ArcelorMittal profit jumps but outlook is muted

AP News
Posted: Oct 26, 2010 7:02 AM
ArcelorMittal profit jumps but outlook is muted

ArcelorMittal, the world's biggest steel maker, posted Tuesday a 48 percent jump in third-quarter net profit, but said higher raw material prices and muted demand dampened its expectations for the rest of the year.

Net profit rose to $1.35 billion in the third quarter, from $910 million a year earlier, as the global recovery boosted demand for steel. Sales increased 30 percent to $21.04 billion from $16.17 billion a year earlier.

But earnings were down from the previous quarter, and the company warned of tougher market conditions ahead.

Profit was down 21 percent to $1.70 billion from the second quarter, as spot steel prices fell but prices for iron ore and other raw material rose. Sales fell from $21.65 billion in the previous three months.

Steel demand is still well below pre-crisis levels, as the construction and automobile sectors struggle to recover.

In the third quarter, Arcelor's operations were running at 71 percent of total capacity, down from 78 percent in the previous three months. The Luxembourg-based company attributed the decline to a "seasonal slowdown, primarily in Europe."

Arcelor was cautious in its outlook for the fourth quarter, "as the expected higher input prices continue to work through the business and demand remains muted, though with some regional differences," Chief Executive Lakshmi N. Mittal said in a statement.

In China, demand fell in the third quarter amid monetary tightening, Arcelor's Chief Financial Officer Aditya Mittal told journalists. "Clearly there was a cooling-down in the second half of the year," he said.

In the U.S., demand for steel was improving in the car industry, but it was still slow in the construction sector, Aditya Mittal said.

He also pointed to a two-speed recovery in Europe, where the North was doing well, particularly Germany. Meanwhile, high unemployment and slow growth was curbing demand in Southern Europe, the finance chief said.

The company said shipments are likely to improve slightly in the final three months of 2010, but average selling prices for steel are expected to decline and capacity utilization will likely remain flat. Cost are also expected to increase, with raw material prices rising further.

The third-quarter results weren't a big surprise, said Alexander Haissl, a steel analyst with Chevreux in Frankfurt who has a "sell" recommendation for the stock. However, "the outlook was a disappointment," he said. "Many have underestimated the margin squeeze" arising from higher costs.

To have more control over spending, developing its own iron ore mines remains a priority for Arcelor, Aditya Mittal said.

The world's three biggest iron ore suppliers earlier this year decided to price their contracts on a quarterly basis rather than an annual one, making steel producers more vulnerable to sudden prices changes.

Arcelor expects to increase its own iron ore production by 10 million tons in 2010.

Previously announced plans to make customers bear some of the costs of higher raw material prices haven't been very successful so far. "We made some attempts to pass on those prices rises," Aditya Mittal said, "but those price rises do not stick."

Headquartered in Luxembourg, the company was created in 2006 through the merger of Arcelor and Mittal Steel. In 2009, it was responsible for about 6 percent of global steel output.