Decarbonization Pressures And Tariffs Will Erode Steel Margins

Key Takeaways

• Heavy reliance on carbon-intensive technology and slow product diversification expose the company to rising costs and declining competitiveness amid global decarbonization trends.
  
• Weak global demand, trade barriers, and sustained overcapacity threaten sales volumes, pricing power, and long-term earnings stability.
  
• Modernization, export growth, and green initiatives are reducing costs, diversifying revenue, lessening financial risk, and positioning the company well for future sustainability-driven demand.

Catalysts

Produces and sells iron and steel rolled products, alloyed and non-alloyed iron, steel and pig iron castings, cast and pressed steel, coke, and by-products in Turkey and internationally.

• The accelerating global move toward decarbonization and stricter environmental standards is likely to marginalize Eregli's carbon-intensive business, as ongoing reliance on blast-furnace technology will saddle the company with rising compliance costs and significant capital expenditures over the next decade, undermining long-term profitability and compressing net margins.
  
• Structural decline in global infrastructure spending, particularly in Eregli's key export markets, poses a risk to future sales volumes as demographic headwinds and shifting economic priorities erode base demand for traditional steel products, putting downward pressure on revenues.
  
• Escalating protectionist and geopolitical measures, such as new safeguard implementations by the European Union and continuation of US Section 232 tariffs, threaten to restrict Eregli's market access, especially with the EU being its main export destination and limited progress in penetrating the US market, directly impacting export revenues and earnings stability.
  
• Chronic overcapacity in global steel production, driven by sluggish demand recovery and persistent excess supply from China and other emerging markets, will likely lead to sustained price competition and further declines in realized sales prices, squeezing Eregli's EBITDA per ton and overall revenue growth.
  
• The company's slow pace in diversifying into advanced, high-margin steel products relative to global peers, coupled with heavy capital allocation requirements for both modernization and green transformation (such as a planned $3.2 billion spend by 2030), increases the risk of deteriorating returns on investment, limiting the ability to defend market share and support long-term earnings growth.

Eregli Demir ve Çelik Fabrikalari T.A.S Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Eregli Demir ve Çelik Fabrikalari T.A.S compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Eregli Demir ve Çelik Fabrikalari T.A.S's revenue will grow by 5.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.6% today to 16.2% in 3 years time.
• The bearish analysts expect earnings to reach TRY 38.2 billion (and earnings per share of TRY 3.31) by about August 2028, up from TRY 5.2 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 6.6x on those 2028 earnings, down from 37.0x today. This future PE is lower than the current PE for the TR Metals and Mining industry at 28.7x.
• 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 30.53%, as per the Simply Wall St company report.

Eregli Demir ve Çelik Fabrikalari T.A.S Future Earnings Per Share Growth

Risks

• The company is undertaking significant modernization with new blast furnaces, coke batteries, and vacuum degassing units, which management expects will materially improve efficiency and lower raw material usage, resulting in a structural cost reduction and an unofficial estimate of a $40 per ton consolidated EBITDA uplift once fully operational-this will support net margin expansion and long-term earnings resilience.
  
• Despite near-term challenges, Eregli anticipates maintaining capital expenditures primarily for productivity and green transformation, with most funding sourced externally; this external funding for projects such as energy efficiency and solar power investments can mitigate strain on balance sheet and ensure continued operational upgrades, which underpins long-term profitability and cash flow stability.
  
• The company has demonstrated disciplined financial management, successfully issuing $950 million in Eurobonds to term out its debt and keep the net debt-to-EBITDA ratio below 3.3 times (with a covenant at 3.5 times), providing ample headroom for weathering macro volatility and maintaining stable shareholder returns, thus reducing financial risk and supporting equity value.
  
• Eregli's export share reached an all-time high (27% of volumes in Q2) even amid protectionist headwinds, and management expects further improvements in export opportunities, principally to the EU and, over time, possibly the US, providing a revenue diversification benefit and downside protection from weakness in any single market.
  
• The company is committed to a $3.2 billion net zero capex plan by 2030, targeting a major ramp-up in crude steel capacity to 13 million tons and adoption of green production technologies, positioning itself favorably against global decarbonization trends and enabling market share gains in a future where sustainability is increasingly recognized in pricing and demand, thus supporting long-term revenue growth and margin improvement.

Valuation

• The assumed bearish price target for Eregli Demir ve Çelik Fabrikalari T.A.S is TRY16.23, which represents two standard deviations below the consensus price target of TRY29.72. This valuation is based on what can be assumed as the expectations of Eregli Demir ve Çelik Fabrikalari T.A.S'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 TRY39.7, and the most bearish reporting a price target of just TRY16.09.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be TRY236.1 billion, earnings will come to TRY38.2 billion, and it would be trading on a PE ratio of 6.6x, assuming you use a discount rate of 30.5%.
  
• Given the current share price of TRY27.66, the bearish analyst price target of TRY16.23 is 70.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.