ArcelorMittal to Hike Stake in VAMA

Steel giant ArcelorMittal ( MT - Analyst Report ) recently announced that it will increase its stake in the downstream automotive steel joint venture, Valin ArcelorMittal Automotive (VAMA), from 33% to 49%. The collaboration is expected to come online by the first half of 2014.

VAMA is expected to emerge as a supplier of high-strength steel and value-added products for China's rapidly growing automotive market. Both ArcelorMittal and Valin plan to increase their capacity by 25% to 1.5 million tons from 1.2 million tons, which is at par with the new shareholding agreement.

The companies also intend to increase their capital investment by 15% to RMB 5.2 billion. VAMA has also signed a purchase deal worth RMB 1.8 million to buy new equipment, including cold rolling facilities, continuous annealing and galvanizing lines.

The companies have also entered into a share swap agreement, under which ArcelorMittal could sell up to 19.9% of the equity it holds in Hunan Valin Steel to Valin Group. However, as part of its long-term strategic initiative, the steel company can retain 10.07% shareholding in Valin Steel.

ArcelorMittal, the world’s leading steel company, believes that the long-term growth potential in the emerging markets is strong. Therefore, the company plans to expand its steel-making capacity and raw materials self-sufficiency through acquisition opportunities, mainly in the emerging markets.

However, ArcelorMittal, in the most recent quarter, reduced its growth outlook for steel and announced a few divestments including the sale of its steel foundation distribution business to Nucor Corporation ( NUE - Analyst Report ) . These divestments are a part of the company’s strategy to dispose its non-core assets, a move which it expects to continue in the second quarter.

We currently have a long-term Underperform recommendation on ArcelorMittal. The company, which mainly competes with U.S. Steel Corp. ( X - Analyst Report ) and Tata Steel Limited, maintains a Zacks #5 Rank, which translates into a short-term (1 to 3 months) Strong Sell rating.