By Don Miller
Lakshmi Mittal, the chairman of ArcelorMittal (NYSE ADR: MT), the world's largest steel company, yesterday issued a warning about the slowing pace of the global economic recovery and lowered his company's third-quarter forecast.
ArcelorMittal posted a 146% rise in net profits in the second quarter compared with the same period last year as demand recovered. However, the company warned third quarter results would slump by as much as 30% - hit by a seasonal dip in demand during the European summer, slower growth in China, and higher costs for iron ore.
"The improved performance in the second quarter is in line with our expectations and reflects the continued slow and progressive recovery," Mittal told The Wall Street Journal. "The challenge for the second half of the year will be to pass on the full extent of cost increases to our customers."
ArcelorMittal estimated third-quarter earnings before interest, tax, depreciation and amortization (EBITDA) of $2.1 billion to $2.5 billion, down from the $3 billion it posted in the second quarter. Net income last quarter was $1.7 billion, after a $792 million loss a year ago, the company said in a statement.
"The second quarter results are strong, but guidance for the third quarter is very cautious," Imran Akram, a London-based analyst at Collins Stewart Plc told Bloomberg News. The average from a survey of analysts by Bloomberg had projected ArcelorMittal's third-quarter EBITDA at $2.67 billion.
The company also said it is going to increase its steel prices by 10% this year, even as it expects demand to weaken throughout most of the world.
Steelmakers are testing the market with higher prices even in the face of falling demand to offset surging raw material costs. They face further cost increases in the third quarter after leading producers of iron ore - the main component of steel production - negotiated an end to a 40-year-old system of setting prices annually.
Prices for iron ore bought from the largest producers, Vale SA (NYSE ADR: VALE) Rio Tinto Group PLC (NYSE ADR: RTP) and BHP Billiton Ltd. (NYSE ADR: BHP), are now set based on market prices during the prior quarter. JPMorgan Chase & Co. (NYSE: JPM) has forecast prices will rise 25% in the third quarter.
Steel companies have been among the large industrial groups clobbered by the recession as the economic contraction of the past two years depressed demand by big customers such as automakers and construction companies.
But as demand increased, prices of hot-rolled steel coil, a benchmark product used in cars and buildings, jumped 17% in the second quarter to $795 a metric ton, the highest since 2008, according to data compiled by Metal Bulletin.
Demand is expected to cool in the third quarter as countries end stimulus programs and economic incentives to buy new cars.
Mittal said demand pressure in many sectors is still weak and, as a result, governments should resist pressure to introduce austerity measures to curb fiscal deficits "too soon".
"In my view there's still a need for governments to pump in a certain amount of money into their economies to stabilize demand," he said.
Still, Mittal said he has ruled out the possibility of a "double-dip" recession later in the year.
"We might see some blips [in the overall direction of the world economy] but no more than this," he said.
Slower Chinese demand and a European debt crisis that risks stifling the region's property market also are hurting steelmakers.
Nucor Corp. (NYSE: NUE), the largest U.S. steelmaker, said last week that rising profits may stall, while Swedish producer SSAB Svenskt Staal AB projected weakening sales.
Mittal said the slowdown in China would be "temporary," and that demand is still growing, albeit at a slower pace.
"We are seeing some likely deceleration in the pace of demand growth in the third quarter, rather than any fall reduction in demand," he told the Financial Times, adding he still expects Chinese steel consumption and production to rise about 10% this year compared to 2009.
In 2009, China accounted for just over two-fifths of world steel production of 1.2 billion tons. As China's steel output rose, it put a floor under global production, which fell by about 8% in 2009. Mittal expects demand for the metal to rise about 10% this year.
ArcelorMittal said it would cut steel production in the third quarter to about 70% of its capacity, compared with 78% in the previous three months. The company cut output by about half last year, fired workers and issued new shares and bonds and renegotiated banking covenants on about $32 billion of credit facilities.
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