A Steel Behemoth Flexes Its Muscles

03/18/2008 12:00 am EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Strategic Advantage, says giant international steel maker Arcelor Mittal is poised to capitalize on its considerable competitive strengths.

Arcelor Mittal (NYSE: MT), the Luxembourg-based behemoth, is the world's largest steel producer, boasting nearly three times the production capacity of the next largest producer. It has led the consolidation of the world steel industry over the past few years and has leading global market shares in automotive, construction, household appliances, and packaging products.

The $4 billion in cost savings from the merger [between] India-based steel giant Mittal merged with Luxembourg-based Arcelor has only highlighted the company's dominant integrated operations.

With operations in more than 60 countries and steel mills on four continents, MT has become the largest steel producer in the world by both volume and sales. Its mills produce about 138 million tons of long and flat steel annually. The company also operates iron mines, coal mines, and coke plants that support its steel-making operations around the world.

MT operates some of the most cost-competitive facilities in the world in low-income countries, and the technology that it's developing to reduce carbon dioxide emissions will ensure that its foreign operations stay online for years to come. And the cutting-edge steel treatments and coatings that it's developing for high-end customers, such as automobile and appliance makers in American and Western European markets, is sure to keep its competitive advantage intact.

MT is largely self sufficient with its own iron ore production. The company currently fulfills 50% of its own raw material, and it plans to further its vertical integration to reach the 75% threshold by 2010. Arcelor also plans to create a supply chain network in North America that will blow its smaller peers out of the water.

Not surprisingly, the increasing global demand for steel gave MT great fourth-quarter and year-end results. Net income increased 30% in 2007 to $10.4 billion from $8 billion the prior year, and the company's strong organic sales growth actually followed increasing steel prices.

As the global industry has consolidated, many producers have closed plants. But the demand for steel in emerging nations hasn't dissipated, so steel prices have risen steadily, as have the shares of small and large producers, alike. Credit Suisse analysts believe that steel prices are heading even higher, citing the fact that global inventory has remained low while demand has outpaced supply in each of the past six years.

MT's new production capacity is projected to slow, and government action in China is slated to shut down inefficient and polluting steel mills in the country. With global demand already high and supply dwindling, steel prices are up more than 40% since October. And since MT's sales growth has been following steel prices up, healthy earnings growth is projected across all of the company's international operations for 2008. So we should be seeing new highs for MT shares this year. Buy MT. (The ADRs closed Monday at $77.21-Editor.)

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