Arcelor profit drops, outlook positive

AP News
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Posted: Jul 27, 2011 7:02 AM
Arcelor profit drops, outlook positive

ArcelorMittal, the world's largest steel maker, remains optimistic about the second half of the year even though it posted an 11 percent decline in second quarter profits.

The company said Wednesday that its net profits in the three months to June 30 fell to $1.54 billion from $1.71 billion a year earlier. The decline was mostly due to last year's profits being inflated by a $555 million one-off gain related to convertible bonds.

When stripping out the results of discontinued operations, net profit would have been down only 2.8 percent.

Sales jumped 25 percent to $25.13 billion from a year earlier and 13 percent from the previous quarter, thanks to higher average steel prices.

The world's steel makers, which were hit hard during the global financial crisis as construction and car production plunged, continue to struggle with a slow recovery in demand in the U.S. and Europe. Cheaper imports from countries like China have also weighed on results in recent years.

However, Luxembourg-based Arcelor said it expected demand to continue to build up again, leading to higher steel shipments in the second half compared with a year earlier.

Chief Executive Lakshmi N. Mittal said his company had delivered a "strong performance" in the second quarter and that the seasonal drop-off in the third quarter is unlikely to be as pronounced as last year.

"Overall the group's performance in the second half of 2011 should compare favorably with the second half of 2010," Mittal added.

Investors reacted favorably to the statement, sending the company's share price higher even as the wider markets continue to decline over concerns over the U.S. debt situation. ArcelorMittal shares in Amsterdam were trading 2 percent higher at euro22.64.

Arcelor's positive outlook for the second half contrasts with a more pessimistic view from United States Steel Corp., which said Monday that it expected its third-quarter profit to fall, pointing to uneven economic recovery in the U.S. and Europe as well as the debt troubles in both regions.

Arcelor's Chief Financial Officer Aditya Mittal told reporters on a conference call that the uncertainty over the fiscal situation in both the U.S. and Europe has not yet affected the company. In the U.S., Republicans and Democrats are locked in a fight over raising the country's debt ceiling, while in Europe, investors continue to fear the debt crisis could engulf big economies like Italy and Spain.

However, Mittal added that bad developments in both regions were the main threat to expected higher shipments in the fourth quarter.

Apart from fluctuating demand for steel, the other big challenge for steel makers has been rising raw material prices. Arcelor has been working hard to mitigate that uncertainty, primarily by buying up its own iron ore and coal reserves.

In the second quarter, Arcelor's own iron ore production rose 11 percent from the previous three months, while coal production increased 7 percent.

The company has also launched a joint $5 billion offer for Australia's Macarthur Coal Ltd. together with U.S.-based Peabody Energy Corp. Macarthur makes pulverized coal, one of the key raw materials needed for making steel.

Aditya Mittal said the companies are currently conducting due diligence on Macarthur and would then decide whether to make their offer binding.