ArcelorMittal's best year since 2008

Arcelor Mittal's share price ran up hard in the past couple of months. With the financial results for the year ended December 2021 now released, it fell 7.3% yesterday.

This is despite the group posting its best annual EBITDA since 2008, a remarkable statistic. When a cyclical business finally has its day in the sun, the results are extraordinary to witness. This period saw a 91% increase in average international dollar steel prices, with a 47% increase in realised rand prices.

As a double-whammy of financial awesomeness, the increased prices were met with a 34% increase in crude steel production. ArcelorMittal has been able to turn up the heat at just the right time. EBITDA margin increased from 0.2% in 2020 to 21.6% in 2021.On the downside, commercial coke production fell 43% due to safety incidents at the coke-making unit. Sales volumes were flat in that business for the year, with the second half really dragging down the result as volumes fell 40% in that period.

The group hasn't wasted this opportunity to make the business more sustainable. Cost savings of over R2 billion were achieved in this period and net borrowings were reduced by over R2.3 billion.

To give further context to the performance, headline earnings swung from a R2 billion loss in 2020 to a R6.86 billion profit in 2021.

Headline Earnings Per Share (HEPS) of R6.15 looks ridiculous against a share price of R9.25. The group is now trading on a trailing P/E multiple of 1.5x! This is extreme even for a cyclical business and reflects the way in which a company like ArcelorMittal can go from zero to hero and straight back again depending on external factors.

The market is clearly worried about the risk of a drop in steel prices and the threat of unfair trade practices in some markets, which have historically hurt the business. International steel prices are already off the highs of 2021, so interpret the trailing P/E multiple with extreme caution.

The group paints a sobering picture of the local economy, where business conditions deteriorated in the second half of 2021. There are some sources of optimism, ranging from renewable electricity build programmes through to potential private sector involvement in rail and port logistics.

Operationally, ArcelorMittal faces high electricity and logistics costs in South Africa, which make it difficult to improve the position on the global cost curve. For example, the electricity tariffs increased by 14%. The group is doing as much as it can though, with the raw material basket (input costs per tonne) increasing only 10% despite the international raw material basket increasing 42%. This is a result of diversifying the sources of raw materials.

Capacity utilisation is a strong story in this result, improving from 42% in 2020 and 60% in 2021 to the current level of 79%.

There are wholesale changes at board level, including the outgoing chairman who served for nine years in that role. Rotations of independent directors are generally considered to be healthy for corporate governance. There is also a new CFO in the business who has been in the role since October 2021.

Those who bought this story at its low point in late 2020 have made a killing, with the share price up from around R0.36 to R9.25 at yesterday's close. That's nearly a 26-bagger!

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