UBS downgrades ArcelorMittal after rally as margins weaken outside Europe

Investing.com -- ArcelorMittal’s rating was cut to “neutral” from “buy” in a note dated Monday by UBS Global Research after a sharp share-price rally and weakening performance outside Europe. 

The brokerage said the stock’s near 52% gain this year, driven largely by expectations for tighter European steel import quotas, has already priced in most of the potential upside, while margins in North America, Brazil and other regions continue to soften. 

UBS lifted its price target by 10% to €35.4 per share but said the valuation now looks full, with shares trading at about 4.8 times 2026 estimated EV/EBITDA, roughly 40% above the five-year average.

UBS said the strongest catalyst for ArcelorMittal has been the European Commission’s proposal to cut steel import quotas by 47%. The measure would sharply reduce flat-steel imports, support domestic utilisation and lift hot-rolled coil prices. 

UBS expects European HRC to rise to about €726 per ton in the second half of 2026, contributing to a doubling of the company’s European EBITDA by 2027. 

Even so, Europe represents only about 30% of group EBITDA, muting its effect on overall earnings. The bank said the expected pricing benefit also remains a 2026-27 story because the legislative process may take about six months to complete.

At the same time, UBS pointed to weakening results elsewhere in the portfolio. North American EBITDA dropped as Section 232 tariffs raised costs for mills in Canada and Mexico, and operational issues in Mexico cut earnings by about $200 million this year. 

North American EBITDA per ton fell from roughly $180 in the first quarter to about $115 in the third quarter. 

UBS reduced its 2025 estimate for the region by about 24% and said it sees no indication of tariff relief, especially after the United States halted trade talks with Canada. 

Net debt rose 10% quarter-on-quarter to $9.1 billion, above the company’s long-standing target of below $7 billion.

Brazil also weighed on the outlook as flat-steel import penetration remained elevated at 22.5% in September, keeping prices subdued. Brazilian EBITDA per ton fell from $124 in the first quarter to about $85 in the third. 

UBS cut its 2025 EBITDA estimate for the segment by 13% and said that although the government is considering anti-dumping duties on Chinese steel products, the outcome remains binary. Without protection, spreads are expected to stay under pressure.

India experienced a different type of headwind: strong production growth and new capacity additions that depressed prices. 

UBS said crude steel output in India rose 10.5% year-to-date, while global output excluding China was flat. 

Despite healthy demand, the ramp-up from major producers weighed on pricing and margins. UBS trimmed its India and joint-venture earnings expectations slightly for 2025.

ArcelorMittal’s third-quarter EBITDA of $1.51 billion came in 4% above consensus, helped by better-than-expected results in North America and Europe. 

But working-capital outflows of $417 million drove free cash flow to negative $538 million and lifted net debt. UBS said the company expects a reversal of that working capital in the fourth quarter, calling it a temporary effect. 

Even with improving European prospects, the bank forecast group EBITDA to fall 3% in 2025 before rising 3% in 2026 and 9% in 2027. Free-cash-flow yield is projected to reach only 4.6% in 2027.

UBS said the combination of a strong year-to-date share performance, softer margins outside Europe and only modest medium-term cash-flow generation justified its downgrade to “neutral.” 

The brokerage added that other European-focused steelmakers such as Salzgitter and SSAB may offer more upside if European steel spreads continue to rise.