2012 has been a tortuous year for investors hoping for a steel rebound. While valuations across the sector have looked low, companies struggled to make price hikes stick and the slowdowns in Europe and China have led to widespread worries about demand. All of that said, ArcelorMittal (NYSE:MT) is now trading close to its 2008 troughs, but without the same debt and inventory worries that attended that low. Constant disappointment has blunted the virtues of making any sort of value call in the steel sector, but patient investors may want to look at ArcelorMittal as a long-range value turnaround.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Diversification and Integration Do Not Matter Today
In a normal environment, ArcelorMittal is a pretty impressive steel company. Not only does ArcelorMittal account for about 8% of the world's steel capacity, but it has about 20% of the global automotive steel business as well as sizable positions in growing emerging market economies like Brazil and India.

ArcelorMittal has also been careful to lock in many of its critical supplies. ArcelorMittal meets over half of its iron ore needs from its own mines, reducing its reliance on companies like Vale (Nasdaq:VALE) or Rio Tinto (NYSE:RIO). The company also controls about 20% of its met coal needs. This advantaged access to materials is certainly a positive when healthy steel demand pushes up spot prices, but it does the company little good when steel demand and pricing are soft.

SEE: Understanding Supply-Side Economics

A Tough, but Not Disastrous Market
With global economic growth apparently back on "pause," steel prices have gone nowhere fast. In fact, steel (hot roll coil) prices are about 20% lower this quarter in the U.S. and Europe versus last year, and about 10% lower in China, and pretty close to flat with 2010 levels. What's worse, it's not as though companies like ArcelorMittal are making up for it with volume.

Overall, it could be a lot worse. While sell-side estimates continue to erode, certainly not helped by recent warnings from Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD), the company is still profitable. What's more, the punishing inventory problems of the last trough aren't a problem this time, suggesting that there will be no need for major capacity shutdowns.

SEE: Commodity Prices And Currency Movements

Balancing Risk and Opportunities
Between 2008 and 2009, ArcelorMittal's balance sheet was a major worry, but investors seem relatively more comfortable with the company's debt now. I do wonder, though, if the company wouldn't like to take advantage of the currently terrible coal market and try to acquire some more met coal assets. At current market prices, ArcelorMittal could likely get quite a bit of bang for its buck, but the lack of balance sheet liquidity and flexibility may make that idea a non-starter.

There are also some risks to the company's emerging market-heavy growth plans. ArcelorMittal has wanted to expand its operations in India for some time now, but bureaucratic hassles in India are holding that up in a big way (and South Korean steel giant POSCO (NYSE:PKX) has run into the same difficulties). Elsewhere, there is still the risk of Chinese overproduction (to stimulate export growth) and a weakening economy in Brazil (where ArcelorMittal has leading share).

SEE: 4 Misconceptions that Sink Emerging Market Investors

The Bottom Line
Asking "how can things get any worse?" in a given commodity market is usually an invitation to find out just how bad things can really get. Therefore, I cannot bring myself to say that the steel market cannot get worse. Prices are 20% lower than a year ago, but they're roughly 65% higher than the lows of the past five years.

I do believe that ArcelorMittal is a value in the making, however. This is a well-run steel company that is well positioned to take advantage of ongoing construction demand in emerging markets. The worry, though, is that the emerging economies have built all the infrastructure they need (or can afford) for the next decade and that commodity demand is going to fall apart.

That's a risk for sure, as is the ongoing substitution of steel with other metals like aluminum. Nevertheless, ArcelorMittal is trading near past cyclical lows, despite being in better shape than in prior lows. ArcelorMittal isn't a get-rich-quick idea, but patient investors may want to give some attention and due diligence to this name.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  3. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  4. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  5. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  6. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  7. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  8. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  9. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  10. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  4. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  5. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  6. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>

You May Also Like

Trading Center