Shares in the world's biggest steel maker ArcelorMittal (MT) should forge ahead this year boosted by resurgent demand, higher prices and new protections for western markets, according to Goldman Sachs.
The bank's analysts, on Monday, increased ArcelorMittal's price target to €10.30 ($10.96) per share on the back of last weeks better-than-expected fourth quarter results. The increase comes less than two weeks after Goldman added the stock to its 'conviction buy' list with a price target of €9.30.
"We see it (ArcelorMittal) as well positioned to benefit from higher-for-longer steel prices and expect earnings growth in 2017," noted Goldman Sachs analysts led by Eugene King. "We also see limited downside risks from low-cost imports as the typical forces driving the boost/burst cycles in steel have been reshuffled."
Amsterdam-listed ArcelorMittal on Friday posted a 20% increase in full-year earnings, its biggest jump in seven years, buoyed by an 82% increased in European steel prices over 2016 and increases in the price of iron ore and coking coal, which the company also produces.
Goldman expects steel demand and prices to remain strong over 2017 as European and U.S. producers benefit from new anti-dumping tariffs, continued strong demand due to below average inventories and declining exports out of China.
"We reiterate our buy rating and raise our 12-month price target to €10.30 ... implying a 25% upside potential, due to 4% higher EBITDA and lower net debt," said Goldman. "We value ArcelorMittal on 6.5 X EV/EBITDA." ArcelorMittal shares are currently trading at about 5.8 X EV/EBITDA based on Goldman's expectations for 2017.
ArcelorMittal, led by billionaire CEO and 38% shareholder Lakshmi Mittal, posted EBITDA of $6.26 billion for 2016, ahead of average analyst expectations of $6.14 billion. Fourth-quarter earnings of $1.66 billion were 51% up on the same period in 2015.
Goldman earlier this month claimed that the steel sector had reached a critical inflection point in 2016 when regulators implemented strict anti-dumping tariffs that should protect the sector from Chinese imports that have played a key role in the boom-and-bust that has crushed profitability in the past. "The election of Mr. Trump with a platform of increased trade protection for US industries increases the likelihood that existing protection measures remain enforced and that additional measures could be added," the bank noted on Feb. 2.
In addition to increased tariff protection Western steel makers had hoped to benefit from China's claim that it had removed almost 100 million tons of steel production capacity over 2016, as part of a five-year plan to cut capacity and support its own embattled producers.
That claim was challenged on Monday in a report produced by Greenpeace East Asia and Chinese steel market consultancy Custeel, which claimed that Chinese capacity actually increased over 2016 as smelters were idled rather than closed while new smelters also came online. "Most of the eliminated capacity was already closed down or idle, meaning that only 23 million tonnes of actually operating capacity was closed," the report claimed. Meanwhile "49 million tons of steel capacity that had previously suspended production restarted...(and) 12 million tons of new capacity was still added."