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ArcelorMittal cautiously optimistic moving forward

Steel manufacturer looking up in the wake of weak European demand

Financial Times

13:46 EDT Thursday, May 10, 2012

ArcelorMittal provided a cautiously upbeat view of prospects in the hard-hit steel industry, after announcing a big fall in net profit in the first quarter as a result of tepid prices and weak demand in Europe.

Lakshmi Mittal, chairman, chief executive officer and main owner of the world’s largest steelmaker, said he saw “improved sentiment in a number of key markets” in the three months to the end of March, along with signs of an upturn in North America.

The company expects “underlying profitability” in all its main operating divisions to improve during the second quarter, as demand gradually picks up and as the steel industry feels some positive effects on pricing from temporary shutdowns of many large plants.

However, Mr. Mittal’s remarks failed to dispel gloom surrounding the company resulting in a fall in net income to $11-million in the first three months, from $1.1-billion in the comparable time in 2011.

Earnings before interest, tax, depreciation and amortization (EBITDA) - which many in the steel industry prefer as a way to express underlying profits - came in at $2-billion in the first quarter.

This was some $300-million above analysts’ projections but 24 per cent down on the $2.6-billion recorded in the equivalent period a year ago.

About $200-million of the higher underlying earnings was due to a change in the way the company accounts for employee benefits.

Net income per share for the company in the January-March quarter was just 1 cent, compared to 69 cents a year previously, while sales for the most recent period edged up 2.3 per cent to $22.7-billion, after $22.2-billion in the equivalent time in 2011.

In a sign of pressure on cash flow, net debt at the end of March was $23.6-billion, $1.1-billion higher than the $22.5-billion recorded three months earlier.

The company said $300-million of this increase was linked to a strengthening of the euro over this period compared to other key currencies including the dollar.

Steel is by far the most widely traded industrial metal.

Depressed conditions among many big users of the commodity - such as in construction, automotive and white goods - have put a lid on prices and squeezed profitability among virtually all large steelmakers.

The sector has been hit by signs of weaker demand in China - which accounts for almost half global production and use of the metal - as a result of a cooling economy.

On a slightly more positive note, ArcelorMittal said it expected EBITDA for the first half of 2012 to be higher than in the second half of 2011.

This implies that this measure of profits is likely to come in at more than about $2.1-billion in the April-June period, showing a gradually improving trend compared to the first three months.

However even if the company hits this target, the figure could easily be well down on the $3.4-billion EBITDA recorded in the second quarter of last year.

In ArcelorMittal’s large operations mining coal and iron ore, Mr. Mittal is aiming for a 10 per cent year-on-year increase in production during 2012, in a continuation of an effort to provide more raw materials for the company’s steel manufacturing.

Mr. Mittal identified automotive and construction equipment in North America as industries where demand for steel was growing.

He said Europe - ArcelorMittal’s largest operating division - remained “the biggest challenge” for his company.

In an effort to put upward pressure on prices, ArcelorMittal has announced temporary closures of some if its steel plants, especially in Europe where underlying demand remains weak.

In an indication of the problems for the industry, ArcelorMittal said average prices for its steel fell 2.3 per cent between the final quarter of last year and the most recent three-month period.

Fluctuations in the rate of the dollar against other currencies also contributed to the underlying profits weakness.

During the whole of 2011, EBITDA for the company was $10.1-billion, after $8.5-billion in 2010.

In the coming year, ArcelorMittal said it would attempt to push down net debt through “improved operating cash flows”. It also anticipated disposals of “non-core” assets.

On this note, the company separately said it was raising €330-million through a sale of its 23.5 per cent share in Enovos International, an electricity distributor, to a fund managed by AXA Private Equity.

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