Insights

Why Shares in ArcelorMittal Slumped Today

What happened

Shares in integrated steel and mining company ArcelorMittal (NYSE: MT) were down nearly 8% this afternoon. The move comes in concert with a generally bad day for so-called “inflation plays” and a downgrade from an analyst at a heavyweight investment company, JPMorgan.

The downgrade from “overweight” to “neutral” and the price target cut was a bad day for investors looking to profit from surging raw materials prices.

There’s a sense that the Federal Reserve’s recent rate hike will lead to more rate hikes, and the bond markets have been busy pricing in higher interest rates. All of this speaks to slowing economic growth in the future as higher interest rates make investment more expensive. Given the sensitivity of steel demand to economic growth, it’s not surprising to see it sold off. Indeed, the steel rebar price (reinforcing bar used in construction, for example) has fallen by around 17% since the start of May.

So what

The bears will point to the fact that factories have rebuilt steel stockpiles, and demand will likely be constrained by slower growth. On the other hand, the bulls will argue that the supply chain issues in the economy have artificially held back growth, and when they get ironed out, more demand for steel will follow. Moreover, the war in Ukraine has damaged its export capability — Ukraine is responsible for around 4% of global steel exports, and ArcelorMittal itself was forced to idle steelmaking operations in Ukraine. Russia is responsible for around 7%.

Now what

Wait and see. It’s tough to tell what economic growth will be in 2022 and how long the war in Ukraine will last. In addition, the COVID-19 lockdowns in China have disrupted economic activity. There’s a host of unknowns that directly impact steel prices and, ultimately, growth prospects at ArcelorMittal.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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