Morningstar has published an in-depth research report, “Strike While the Iron is…Cold?” arguing that cheap iron ore will have profound implications for the steel industry. Iron ore’s new normal will mean lower steel prices and a flatter cost curve. At the company level, cheaper iron ore means different things for different players.
Key takeaways from report
- Low iron ore prices will redefine how steelmakers compete. Input costs will remain a key driver of competitiveness but will diminish in relative importance.
- Conversion costs are increasingly critical. Firms with low conversion costs such as Nucor and Ternium are poised to benefit in the new competitive landscape.
- Vertical integration loses its strategic appeal. Upstream exposure has always meant higher earnings volatility (fixed costs/variable prices), but the downside wasn’t apparent amid high iron ore prices.
- Vertically integrated steelmakers will suffer margin contraction. Falling iron ore prices portend lower steel prices but provide no cost relief for vertically integrated players such as CSN and U.S. Steel. Over the long term, Morningstar analysts expect steel demand growth and better leverage over fixed costs to be the saving grace for these otherwise challenged companies.
- Morningstar analysts believe that concerns about ArcelorMittal‘s upstream investments are overstated, allowing for a very attractive entry point on a promising turnaround story.
The research piece follows Morningstar’s expectations for a decline in iron ore prices to $70 per ton by 2017.