What's going on?
ArcelorMittal, the major steel producer, said its profit fell 33% in the first quarter versus a year ago – but it had some good things to say about the steel industry going forward.
What does this mean?
Last year, China exported a lot of steel because demand within China was weak. It was basically flooding the global steel market. The result was a huge decline in the steel price. However, since mid-February, the price of steel (and its main ingredient, iron ore) has rocketed higher primarily due to demand in China increasing (because the Chinese government is stimulating its economy by doing things like encouraging companies to build factories, which obviously requires steel). Arcelor’s profit was already starting to improve in the second half of the first quarter and Arcelor expects the improvement to be fully reflected in its second quarter results.
Why should I care?
The bigger picture: This is a prime example of China’s impact on western companies. Arcelor’s stock price is up 75% since February and a big part of that is because China’s economic stimulus has given a huge boost to the steel price. China has a huge impact on many western companies – especially in the commodities sector (like miners and steel producers) – which is one reason its economy gets so much coverage.
For markets: Most of the Chinese-driven surge might have already taken place. Chinese stocks actually had their worst day in over two months on Friday (and, in fact, the price of steel bars fell almost 10% last week). One fear is that China can’t afford to stimulate its economy too much and so is taking their foot off the accelerator. There is already a huge amount of debt in China (i.e. companies have borrowed a lot of money) and the government might be wary of increasing that too much (which is basically how the stimulus has been working). Keep an eye out for signs that this China-driven commodities rally is coming to an end.