As Washington lawmakers settle into familiar intransigence, investors are starting to worry again about economic growth. This is creating a buying opportunity in cyclical leaders.
Industrial and commodity sensitive stocks slumped on Monday as several senators voiced opposition to more stimulus spending. It looks like the era of bipartisanship lasted all of one week.
Still, investors should look past the American gridlock.
Because no matter what happens in Washington, certain picks will thrive anyway.
I’m talking about companies like ArcelorMittal (NYSE: MT), a steel giant that’s ready to capitalize on bullish trends already set in place.
Arcelor is the world’s largest integrated steel and iron ore mining company, with operations in 60 countries.
Headquartered in Luxembourg, the sprawling conglomerate is the product of a 2006 merger between Arcelor and Mittal Steel, an Indian steel firm. At the time, the combined businesses controlled 10% of the world’s steel.
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Through the course of the next 15 years, Arcelor managers continued to consolidate fragmented steel businesses. They bought up new European, South African and Chinese steel mills, focusing on the flat rolled variant used in automotive and appliances. Meanwhile, the sheer scale of its operations allowed managers to dictate prices.
The company has 11 state-of-the-art research facilities. Engineers are currently active in more than 100 research projects, including 3D printing for use in the automotive and building sectors.
In 2019, Arcelor engineers printed the first steel bridge. The structure was installed in 2020 to span the Oudezijds Achterburgwal canal in Amsterdam.
This effort shows how industrial companies are adopting the digital transformation theme into their businesses — reducing friction and costs by replacing physical processes with software.
This is not a one-time experiment; it’s the dawn of a new era in which steelmakers can be tech leaders.
And even if lawmakers in the United States really do drop the ball in terms of stimulus spending, the core business has very little direct exposure to this market.
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According to a press release in 2020, Arcelor managers entered into a $1.4 billion agreement to sell its U.S.-based steel operations to Cleveland-Cliffs Inc. (NYSE: CLF). Arcelor will continue to operate mills in Canada and Mexico.
Shareholders are left with a well-managed business with huge leverage to any uptick in the global economy.
Jan Hatzius, chief economist at The Goldman Sachs Group, Inc. (NYSE: GS), told institutional clients on Jan. 8 that the investment research firm expects 5%-6% GDP growth in Europe and 8% GDP growth in China. Those levels are several clicks higher than current activity. Plus, global central bankers are not expected to begin raising interest rates until 2025.
If this scenario plays out … the outlook would be extremely bullish for steel.
Prices have been firm since late last year. Several steel makers struggled to bring shuttered plants back online quickly, leaving product in short supply.
When Arcelor reported third-quarter financial results in November, sales swelled to $13.3 billion, up from $10.9 billion in Q2. Operating income reached $718 million, up significantly from a $252 loss reported three months previous. For perspective, the company earned $297 million in Q3 2019.
Shares have retreated back to around the $21 level after cresting near $26 two weeks ago.
Savvy investors should use any near-term weakness as a buying opportunity.
Best Wishes,
Jon D. Markman
