ArcelorMittal Forecasts Profit Slump in Third Quarter
Lakshmi Mittal, chairman and chief executive officer of ArcelorMittal, speaks during a conference in Sao Paulo. Photographer: Paolo Fridman
ArcelorMittal, the world’s biggest steelmaker, forecast third-quarter profit will slump as much as 30 percent from the prior three months as China’s economy slows, costs rise and demand weakens during the European summer.
ArcelorMittal estimated earnings before interest, tax, depreciation and amortization of $2.1 billion to $2.5 billion, down from the $3 billion it posted today for 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,” said Imran Akram, a London-based analyst at Collins Stewart Plc. ArcelorMittal’s third-quarter Ebitda outlook compares with the $2.67 billion average of nine analyst estimates compiled by Bloomberg.
Steelmakers are seeking to raise prices to pass on surging raw material costs even as they face falling demand as countries end economic incentives to buy new cars and Chinese consumption slows. They face further cost increases in the third quarter after leading producers of iron ore, used to make the metal, ended a four-decade-old system of setting prices annually.
“The summer slowdown in Europe, as well as the economic slowdown in China, is putting a constraint on steel prices while raw material costs continue to rise,” Chief Financial Officer Aditya Mittal told reporters on a conference call today.
ArcelorMittal fell 2.1 percent to 24.20 euros in Amsterdam trading.
Stainless Spinoff
The Luxembourg-based company will study a spinoff of its stainless steel unit to current shareholders to allow the business to pursue growth. The unit reported Ebitda of $191 million in the second quarter on sales of $1.54 billion.
The spinoff would take place at the start of next year at the earliest, with the Mittal family keeping a “substantial” stake, Aditya Mittal said. Stainless makers face overcapacity in Europe and may look at consolidation to cut costs, he said.
“The consideration of a spinoff of stainless is possibly a smart move by management to find a solution to a major problem area,” Olivetree Securities Ltd. analyst Christian Georges said in London. “Externalizing the operation may bring opportunities for consolidation.” It “certainly externalizes the need for the group to get involved in a necessary restructuring.”
ArcelorMittal reported its fourth consecutive profit in the second quarter as higher metal prices and demand boosted sales.
Prices Surge
“Although the third quarter will be impacted by a combination of seasonal factors and the effects of the economic slowdown in China, underlying demand continues to show improvement,” Chief Executive Officer Lakshmi Mittal said in the statement. “The challenge for the second half of the year will be to pass on the full extent of cost increases to our customers.”
Hot-rolled steel coil, a benchmark product used in cars and buildings, jumped 17 percent in the second quarter to 610 euros ($795) a metric ton, the highest since 2008, according to data compiled by Metal Bulletin.
Prices for iron ore bought from Vale SA, Rio Tinto Group and BHP Billiton Ltd., the largest producers, are now set based on market prices during the prior quarter. JPMorgan Chase & Co. forecast prices will rise 25 percent in the third quarter.
Slower Chinese demand and a European debt crisis that risks stifling the region’s property market are hurting steelmakers. Nucor Corp., the largest in the U.S., said last week that profit gains may stall, while Swedish producer SSAB Svenskt Staal AB forecast an industry weakening. That may force companies to reverse the year’s production gains, according to Eurofer, representing European steelmakers including ArcelorMittal.
Cutting Output
ArcelorMittal said it will cut steel production in the third-quarter because of a “seasonal slowdown.” The company expects to use 70 percent of its capacity in the quarter compared with 78 percent in the previous three months. It forecast that prices would remain stable.
The company cut output by as much as half last year, fired workers and sold shares and bonds to refinance debt. It raised $11.4 billion in the second quarter of the year to accelerate debt-reduction plans and in July renegotiated banking covenants on about $32 billion of credit facilities.
ArcelorMittal was formed by the takeover of Arcelor SA by Mittal Steel Co. in 2006 in the industry’s biggest takeover.
To contact the reporter on this story: Thomas Biesheuvel in London tbiesheuvel@bloomberg.net.
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