Key Highlights from Steel Companies’ 3Q15 Earnings
(Continued from Prior Part)
Industry outlook
The steel industry’s 3Q15 financial results weren’t that disappointing. However, the stocks fell after the earnings release due to poor guidance. To be sure, two of the biggest steel companies in the US (DIA)—ArcelorMittal (MT) and U.S. Steel (X)—slashed their 2015 EBITDA (earnings before interest, tax, depreciation, and amortization) guidance.
For U.S. Steel, this was the second downward revision to its 2015 EBITDA guidance. You can see this in the above graph.
Challenging 4Q15
Meanwhile, 4Q15 seems to be even more challenging than 3Q15. As Mark Millett, Steel Dynamics’ (STLD) CEO, said during the earnings call for 3Q15, “We believe the current elevated level of domestic supply chain inventory, combined with the continuation of excessive steel imports and typical fourth quarter seasonality, could further erode domestic steel industry profitability in the fourth quarter 2015.”
Lower spot steel pricing
Please note that spot steel pricing started to deteriorate towards the end of 3Q15. The impact of lower spot steel pricing might be visible in steel companies’ 4Q15 earnings. While admitting that “operating environment has continued to deteriorate through the third quarter,” ArcelorMittal’s chairman, Lakshmi N. Mittal, said that “I do not believe this challenging environment to be sustainable.”
ArcelorMittal and AK Steel (AKS) also raised concerns about the contract pricing for the next year. In its Flat-Rolled segment, U.S. Steel sells almost 50% of its produce on contract pricing. In the earnings call for 3Q15, U.S. Steel said that almost two-thirds to three-quarters of these contracts would be rolled over on January 1, 2016. Currently, U.S. Steel forms 0.10% of the Wisdom Tree MidCap Earnings ETF (EZM).
Looking at the current weak spot pricing, supply contracts might be rolled over at a lower price—compared to what they are currently. This could have a negative impact on steel companies’ 2016 earnings.
Read Key for Investors: Steel Industry’s Outlook Keeps Getting Worse to learn more on where the steel industry could be headed in the coming months.
Visit Market Realist’s Steel page for other recent developments in this industry.
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