Shares of globally diversified steelmaker ArcelorMittal (NYSE:MT) fell 11% in March, according to data provided by S&P Global Market Intelligence. It wasn't alone in the drop, with United States Steel (NYSE:X) and AK Steel (NYSE:AKS) falling 12% and 9%, respectively. Fellow steelmakers Nucor and Steel Dynamics didn't experience similarly deep declines, and were down just 3% and 6%, respectively. There's a bigger story here, and it all leads back to iron ore miner Vale S.A. (NYSE:VALE).
In February, a dam containing mine waste ruptured at a Vale mine in Brazil. It was the second such disaster at a Vale operation in the last few years. That led to a broad review of mine waste facilities in Brazil, to ensure that everything possible was done to avoid a third disaster.
Unlike most of its U.S. peers, ArcelorMittal is vertically integrated, meaning that it owns mining operations and steel mills. Residents near one of its Brazilian mines were evacuated in February. So while ArcelorMittal isn't directly in the line of fire in the events following Vale's second dam disaster, the steelmaker is getting tarred with the same brush to some extent. That's likely to put a damper on the stock until the Vale issue has passed.
But that's just one piece of the puzzle here. Vale's troubles have led to a broader disruption in the iron ore market. It is one of the largest providers of iron ore in the world, and deliveries have been impacted since the disaster. In fact, Vale recently announced that sales in 2019 would be down 20% from its prior expectations -- a big change. Iron ore prices, meanwhile, have been rising as investors had largely expected such an outcome.
A material portion of ArcelorMittal's steel production is from blast furnaces, which use iron ore as a key input. The same is also true of AK Steel and U.S. Steel. All three, then, are facing the headwind of higher iron ore costs. Less impacted are Nucor and Steel Dynamics, which use electric arc furnaces, where scrap steel is the primary input. That goes a long way toward explaining the differences in stock performance noted above, with ArcelorMittal having the added headwind of operating mining assets in Brazil.
As far as steelmakers go, ArcelorMittal is differentiated in its business approach from the larger U.S. mills. The combination of being vertically integrated and globally diversified changes the equation a great deal. While that might be seen as a positive in the big picture, right now it is a material negative because of the second Vale dam disaster in a relatively short time. The effects here are also hitting other steelmakers, and there remains a great deal of uncertainty. The steel industry is highly cyclical, and recently has been doing very well, suggesting the top of the cycle has been reached. Most investors should probably wait on the sidelines to see how things play out.