ArcelorMittal Needing Production Cuts as Costs Spiral, Squeezing Returns

ArcelorMittal and competitors in Europe will probably curb steel production to support prices as they struggle to pass on higher raw-material costs, just as a regional debt crisis and rollbacks in state spending cut demand.

“You’ll see some blast-furnace stoppages,” said Gordon Moffat, director general of Eurofer, representing steelmakers in Europe including ArcelorMittal, the world’s biggest. “It looks like they’re responding to a weakening of the market.”

Slowing demand is damaging efforts to sustain output gains during the past year after the industry hauled itself out of its worst crisis in 60 years. ArcelorMittal said June 3 it was ready to halt three blast furnaces should seasonal trends reduce demand next quarter. ThyssenKrupp AG, Germany’s top producer, said June 15 it will scale back processing at some plants.

Even after ArcelorMittal boosted production of flat carbon steel in Europe by 62 percent last quarter, the Luxembourg-based company is operating below capacity as it slashed global output by as much as 50 percent during the economic slump. Shutting plants may help to buoy prices as demand from automakers slides.

“Prices have come under pressure worldwide,” said Imran Akram, a London-based analyst at Collins Stewart Plc. “It is looking increasingly as if the industry will need to idle more capacity than has been announced.”

Prices Slip

Chinese steel prices, which typically lead European rates, fell 6 percent to 4,316 yuan ($634.73) a ton in May, the first drop since January, according to data from Beijing Antaike Information Development Co. Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, said June 4 it cut prices after eight months of flat or rising rates. China is the world’s biggest steel producer.

“There is now a risk that steel production has increased more quickly than the recovery in real demand, which could lead to pricing pressure” in the second half, Matthias Hellstern, an analyst at Moody’s Investors Service, wrote in a note.

ArcelorMittal said in April it would expand worldwide output to 80 percent of capacity in the second quarter from 72 percent in the prior three months. In February it said production would reach 85 percent by the end of the year.

Europe’s steel industry, while suffering from declining demand in the “near term,” will benefit in future years as governments and companies cut debt and a lower euro boosts exports, Goldman Sachs Group Inc. said May 26.

Seasonal Lull

ArcelorMittal spokesman Giles Read said expectations of a slower third quarter were a result of a “seasonal lull” in the summer months. ThyssenKrupp is running its blast furnaces at full capacity and doesn’t plan to halt them, Essen-based company spokesman Erwin Schneider said yesterday in an e-mail.

Still, Bank of America Merrill Lynch forecast production by European steel mills will drop 15 percent next quarter from the previous three months, compared with an average 7 percent reduction in the third quarters of 2002 through 2007.

European producers face falling demand as governments end incentives to buy new cars introduced as part of economic stimulus measures and the debt crisis centered on Greece stifles the chances of a housing-market recovery across the region.

Fiat SpA Chief Executive Officer Sergio Marchionne forecast in March that demand for cars in Europe this year will drop about 15 percent to the lowest level since 1994. French new car registrations fell 12 percent in May after a year of monthly gains. Automotive and construction companies made up 43 percent of European steel consumption in 2008, according to Moody’s.

Dwindling Demand

“We are looking at weak demand from autos in the second half and at this point construction is likely to remain weak,” said Christian Georges, an analyst at Olivetree Securities Ltd. in London. Steel “price deflation in the second half will be extremely difficult to prevent.”

Steelmakers are seeking to bolster prices in preparation for further gains in iron-ore costs in the third quarter after the raw material almost doubled in April. The quarterly price for ore from Rio Tinto Group and BHP Billiton Ltd., the second- and third-largest producers, may climb about 23 percent to $148 a metric ton from July 1, according to Macquarie Group Ltd.

ArcelorMittal has slumped 24 percent in Amsterdam trading this year, compared with a 1.6 percent drop in the Stoxx Europe 600 Index of regional shares. ThyssenKrupp tumbled 18 percent, and Voestalpine AG, Austria’s largest steelmaker, 6.6 percent.

ArcelorMittal CEO Lakshmi Mittal said in March the company needed to raise fees after miners of iron ore ended a 40-year custom of fixing prices annually and switched to supply contracts that change every quarter.

Iron Ore Costs

The cost of ore, the largest raw-material expense in steel production, is about $170 per ton of steel, based on current prices, according to BofA Merrill Lynch. Steelmakers use 1.6 tons of iron ore and 0.5 tons of coking coal to make 1 ton of steel. Raw materials account for as much as 75 percent of production costs for mills, according to JPMorgan Cazenove.

ArcelorMittal said May 12 it will raise hot-rolled coil prices to 650 euros ($800) a ton in July, from prices at the time of 560 to 620 euros. ThyssenKrupp will increase prices by an average 200 euros over all products in July, Schneider said.

“The mills must make one or two decisions to cut capacity and tighten the market or accept that they have to suffer the extra cost of iron ore,” Peter Fish at Sheffield, England-based metals consultants MEPS International Ltd. said by telephone. “There won’t be many mills at the end of the year operating at a higher rate than they were in the second quarter.”

To contact the reporter on this story: Thomas Biesheuvel in London tbiesheuvel@bloomberg.net

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