Steeling Through the Canadian Arctic & South Africa
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
ArcelorMittal (NYSE: MT) aims at creating value with proper management strategy, expanded global reach, new technology, and sustainability, which also makes it a global leader in the steel industry. Its recent acquisition of the May River Deposit and the agreements it has executed in South Africa will help the company maintain its growth momentum in the long term. The company also remains focused on emerging markets like Brazil and China for its profits. The company has a significant market share in Brazil of about 30%, and it's trying to expand its operation in China, which produces half of the world's steel.
The U.S. Steel Corporation has great exposure to the tubular products market. Its subsidiary, Steel Tubular Products, entered into a joint venture called Patriot Premium Threading Services with Butch Gilliam Enterprises LLC to provide tubular services at the Permian Basin, Texas. The joint venture will be a complete service provider that will be licensed to thread U.S. Steel Tubular’s products along with accessories, and also to provide repairs, maintenance, and other technical assistance. The company already has an existing customer base in the energy segment, as it mainly deals in casing, tubing, line pipe, etc. Gilliam's deep knowledge of the energy sector and threading services will help the company provide better quality goods to U.S. Steel's existing customers and will help it tackle the future needs that may arise in the sector.
Steel Dynamics: The company, with its unique mini model, enjoys a competitive advantage over its rivals like US Steel. US Steel manufactures steel from iron ore, a process which uses energy in huge quantities, thus making its production more costly. On the other hand, Steel Dynamics recycles steel and metal scrap in electric arc furnaces, which utilize less energy and capital, leading to better operating margins. This also takes less preparation time and allows it to shift to different projects. Steel Dynamics is making diversifications and expansions in its product offerings and has planned to install a heat treating system in Structural and Rail Division's, which will produce about 35,000 tons of standard-strength and head-hardened plain, carbon steel rails for North America's railroad industry. This is a $27 million investment, and construction is expected to start in 2013. This will result in cost saving by reducing the cost of maintenance and replacement.
Bringing back our focus to ArcelorMittal, its ongoing dispute with the French government regarding nationalization of its Florange plant has finally come to an end. This has led to some positive outcomes, as the downstream facilities of Florange remain of utmost importance to ArcelorMittal, giving it huge exposure in the automotive sector. Apart from this it also has two other prominent fundamentals that will be crucial in its long term growth.
Acquisition of May River Deposit:
In 2011 ArcelorMittal acquired the May River deposit in the Canadian arctic region for a consideration of around $ 567 million with a view to achieve its goal of doubling its iron-ore production and to reduce its dependence on external suppliers in order to emerge as a world class steel and mining company. The company has already bagged approvals for this multi-billion dollars venture to develop one of the world’s largest iron-ore mines in the Baffin Island, Canada.
The mines have the potential to generate $21 billion worth of iron-ore. The current production plan is for around 18 million tons of ore, which will increase quickly within few years of production. These arctic mines are untapped, and it is estimated that they hold approximately 373 million tons reserves of iron ore. Besides this, the mines are heavily loaded with other resources too, which can be the target of future explorations. It is expected that besides iron ore, these mines hold around 4.3 billion tons of crude ore, which is ready to be explored. The ore is not only in abundance, but is of high quality as well. These mines hold Tier 1 category reserves, i.e. 75% high-grade lumps, which is rare. The mined ore is of such a good quality that it can be shipped just after crushing and screening. It won't require processing or pelletizing of any kind. Hence it reduces the overall waste and cost of the project.
The company was a supplier by choice when it came to the South African power giant, Eskom. ArcelorMittal South Africa has entered into a 10 year steel supply agreement with Eskom, which has to procure steel for its ongoing renovations and construction of power stations. This agreement includes the supply of flat and long steel products, casting, forging, steel alloys, tubes, cold form sections, mesh products, and exotic steel products. In addition to this, the company's Vereeniging site supplies steel to Sulzer Pumps, which in turn provides pumps to Eskom.
Along with this, the company is also in discussions with Hitachi Power Africa regarding boiler building projects in some of its power stations that are under construction.
Summing up, I think this company, which produces 10% of the world's total steel production, has a growth road lying ahead. What I like the most about its strategy is its vertical integration approach, which makes it more competitive and flexible than its rivals. It helps the company in generating higher earnings with reduced raw material costs. With such profitable prospects and operational excellence this company remains my favorite for a long haul.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of ArcelorMittal. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!