Decarbonization Delays And Overcapacity Will Threaten Margins

Key Takeaways

• Delays in decarbonization efforts and exposure to low-cost global competition threaten SSAB's ability to maintain premium pricing and strong margins.
  
• Structural declines in core market demand and inflexible cost base elevate risks of stagnant revenues and reduced profitability under shifting industry dynamics.
  
• Market leadership in premium and sustainable steel, robust demand across key sectors, and strong cost controls position SSAB for resilient growth and superior profitability.

Catalysts

Engages in the production and sale of steel products in Sweden, Finland, the Rest of Europe, the United States, and internationally.

• The company's transition to fossil-free and green steel production has experienced significant delays, such as the one-year postponement of the Luleå mini-mill due to power infrastructure upgrades; further bottlenecks in decarbonization investments may erode SSAB's competitive advantage, reduce premium pricing, and threaten revenue growth and net margins for years ahead.
  
• An ongoing trend of global steel overcapacity, particularly driven by low-cost producers in China and subsidized exports from other regions, continues to pressure European standard steel prices, causing lower ASPs for over half of SSAB Europe's volume and compressing margins structurally, with no clear sign of industry-wide discipline returning.
  
• If the long-term decline in steel-intensive infrastructure and construction demand across mature European markets persists as populations age and urbanization stalls, SSAB could face stagnant or falling shipment volumes in its core regions, directly impacting total revenue and leading to structurally lower operating leverage.
  
• Persistent geopolitical tensions and protectionist measures, such as trade tariffs or the uncertain implementation of CBAM in Europe, are driving market volatility and creating material risk of trade barriers and retaliatory measures that could disrupt SSAB export flows and global revenue streams, while also leading to cost inflation and possibly lower earnings stability.
  
• Because of SSAB's high fixed-cost base and aging legacy manufacturing assets, there is limited flexibility to adapt to sudden shifts in demand or evolving regulatory standards, which may further lower return on invested capital and place sustained downward pressure on net margins as industry dynamics continue to shift unfavorably.

SSAB Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SSAB compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SSAB's revenue will decrease by 1.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.0% today to 4.5% in 3 years time.
• The bearish analysts expect earnings to reach SEK 4.4 billion (and earnings per share of SEK 4.31) by about July 2028, down from SEK 5.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, up from 11.6x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 13.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.83%, as per the Simply Wall St company report.

SSAB Future Earnings Per Share Growth

Risks

• SSAB's leadership in advanced high-strength steels, ongoing expansion of premium product offerings, and partnership agreements with key automotive players indicate strong long-term demand and potential for higher average selling prices, which can drive revenue growth and enhance profitability over time.
  
• The company's progress in fossil-free and Zero steel production, despite temporary project delays, positions SSAB as a front-runner in green steel, attracting high-margin contracts and giving it a competitive advantage as decarbonization and sustainability become increasingly important, likely supporting future operating margins.
  
• Demand from sectors tied to infrastructure, shipbuilding, energy transmission, mining, and defense remains robust, particularly in the US and select global end-markets, suggesting that SSAB's exposure to these growth industries could underpin resilient volumes and support future revenue and earnings.
  
• Operational excellence programs, cost structure optimizations (such as automations and flexible staffing), and successful execution of cost-saving measures provide resilience during downturns, resulting in better-than-peer operating margins and providing stability to earnings even in challenging markets.
  
• Industry consolidation, higher standards for sustainable production, and regulatory changes (like CBAM in Europe) are likely to favor first movers and innovative producers such as SSAB, supporting their longer-term market share and pricing power, with positive implications for both revenues and net margins.

Valuation

• The assumed bearish price target for SSAB is SEK51.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SSAB's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK85.0, and the most bearish reporting a price target of just SEK51.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK97.2 billion, earnings will come to SEK4.4 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of SEK59.2, the bearish analyst price target of SEK51.0 is 16.1% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.