A Comparative Analysis of the Steel Industry
(Continued from Prior Part)
EBITDA margins
Steel companies are finding it tough to manage their profit margins amid falling steel prices and lower capacity utilization rates. We’ve previously noted how average steel selling prices have fallen for steel companies. In this article, we’ll explore how EBITDA (earnings before interest, taxes, depreciation, and amortization) margins vary between steel companies.
ArcelorMittal (MT) has managed to hold its EBITDA margins at over 8% despite a steep fall in steel and iron ore prices. The company has been aggressively cutting costs in all of its business segments. ArcelorMittal has also managed to bring down unit costs in its mining business.
AK Steel (AKS) has seen huge volatility in its EBITDA margins, as can be seen in the graph above. Its margins are currently lower as compared to other steel companies.
U.S. Steel’s margins
U.S. Steel’s Corporation’s (X) EBITDA margins have been quite volatile also, as shown in the chart above. The company has been hit by lower capacity utilization rates in its blast furnaces. The slowdown in the energy sector has further dented the company’s earnings over the last couple of quarters.
Nucor’s EBITDA margins have been stable
Nucor’s (NUE) EBITDA margins have been quite stable as compared to its peers. Nucor has a variable compensation structure for its employees. In contrast, most of its peer companies give their employees fixed compensation. A variable compensation structure serves the dual purpose of increasing productivity through a motivated workforce and keeping a check on labor costs in downturns.
Currently, Nucor forms 2.61% of the Materials Select Sector SPDR ETF (XLB).
When capacity utilization rates are low, as they are currently, profitability of steelmakers using blast furnaces comes down. On the other hand, steel companies using EAFs (electric arc furnaces) to produce steel generally don’t see huge swings in their profits. Nucor and Steel Dynamics (STLD) produce steel through EAFs.
In the next article, we’ll explore how steel companies are managing their leverage ratios.
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