ArcelorMittal released its second quarter results and conducted a conference call with analysts on July 31. As expected, the company’s results were negatively impacted by a combination of the impact of weak iron ore prices on the earnings of the company’s Mining division, and the impact of a strong U.S. Dollar on the earnings of the company’s international steelmaking operations. In addition, weak market conditions for steel in North America, as a result of competition from cheap steel imports, also weighed on the company’s Q2 results. ArcelorMittal’s closely-watched earnings before interest, taxes, depreciation, and amortization figure fell around 21% year-over-year to $1.40 billion.

Revenues for the second quarter stood at $16.9 billion, around 18% lower than in the corresponding period last year. This was primarily due to lower revenues from ArcelorMittal’s Mining division, which was impacted by the decline in iron ore prices, and the impact of the depreciation of global currencies against the Dollar on the revenues of the company’s international operations. In this article, we will take a closer look at ArcelorMittal’s second quarter results.

Iron Ore Prices

ArcelorMittal’s iron ore shipments are either transferred to its steel producing divisions on a cost-plus basis or sold at market prices, either to third parties or to the company’s steel producing divisions. The company has been raising the proportion of market-priced iron ore shipments over the last few years. Market-priced shipments accounted for 53% of the company’s iron ore shipments in 2012. This figure rose to 63% in the first half of 2015.

Iron ore is the chief raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining its prices. Benchmark international iron ore prices are largely determined by Chinese demand, since Chinese steel mills purchase nearly two-thirds of the world’s seaborne iron ore supply. Chinese steel demand growth is expected to decline by 0.5% in 2015, following on from a 3.3% decline in 2014. Weak demand for steel has indirectly resulted in weak demand for iron ore.

On the supply side, an expansion in production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. The worldwide surplus of seaborne iron ore supply is expected to rise to 437 million tons in 2018, from an expected surplus of 184 million tons in 2015. A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term. The following chart illustrates the trajectory of iron ore prices over the last twelve months.

Weak iron ore prices have negatively impacted the results of ArcelorMittal’s Mining division. As a result of the fall in iron ore prices, the company’s Mining division reported a 30% year-over-year fall in revenues to $964 million in Q2 2015. In addition, the division’s EBITDA fell sharply by roughly 70% to $115 million. Thus, the Mining segment’s performance was a major drag on the company’s Q2 results.