May 16, 2008
Iron Man's impenetrable suit can't have been cheap to build. The materials alone must have cost a pretty penny. If only the margins of steel companies were proving to be as well-protected as the comic book hero.
ArcelorMittal (NYSE: MT ) announced record results for the first quarter of 2008, and coupled the release with a bullish forecast for the second quarter.
As much as I would like to warm up to the steel companies here, I'm still seeing margins contracting everywhere I look. Despite a 22% rise in sales from the prior year, to a whopping $29.8 billion, EBITDA rose only 16% to $5 billion. Net earnings actually slipped below the result from the fourth quarter of 2007, attributable in part to a $242 million hit from the revaluation of financial instruments.
CFO Aditya Mittal cautioned that higher prices for steel products will work their way down to the global consumer via "the cars we buy, the houses we build, and the appliances we want to buy." The presumption is that this will begin to erode demand for the more consumer-discretionary applications of steel. The company pointed to an additional price hike for the third quarter that may cushion margins.
The item that really caught my attention was the company's development of an iron ore mining project in Mauritania. To help cover the gap in its iron ore production, the company recently signed a long-term contract with Vale (NYSE: RIO ) . The company also purchased a couple of coal mines in Russia from steelmaker Severstal, and signed off-take agreements with a coal mining company in South Africa.
In the long run, I believe the steel companies that prove most effective at securing their own supply of raw materials will emerge from this inflationary period in the most competitive position. ArcelorMittal, the largest steel company in the world, and with a strong global presence, may yet learn to forge its margins in steel.