ArcelorMittal Profit Beats Estimates; Sees Seasonal Slowdown

ArcelorMittal (MT), the world’s biggest steelmaker, posted first-quarter profit that beat estimates and forecast higher earnings in the three months to June, before a seasonal decline in demand in the second half.

Earnings before interest, tax, depreciation and amortization rose 52 percent from a year earlier to $2.58 billion, Luxembourg-based ArcelorMittal said today in a statement. That beat the $2.39 billion average estimate of 20 analysts surveyed by Bloomberg. Net income climbed to $1.07 billion, from $640 million a year earlier.

Higher prices driven by increased demand from manufacturers and automakers are aiding steelmakers who have struggled to pass on rising costs for iron ore and coking coal, used in blast furnaces. The cost of European hot-rolled steel coil, a benchmark product used in buildings and cars, rose 25 percent in the quarter. The World Steel Association last month forecast steel use would gain 5.9 percent this year.

“We are encouraged by ArcelorMittal’s ability to offset higher raw material costs with higher selling prices in the near term, although recent softening in steel prices in Europe and North America suggest ArcelorMittal’s margins may come under pressure later in the year,” Jeffrey Largey, a London-based Nomura Holdings Inc. analyst, wrote in a note today.

Second-Quarter Outlook

ArcelorMittal slipped 80.5 cents, or 3.2 percent, to 24.485 euros in Amsterdam trading, the biggest drop in almost six months.

Ebitda will be $3 billion to $3.5 billion in the second quarter, ArcelorMittal said. That compares with the average estimate of $3.21 billion from 10 analysts surveyed by Bloomberg.

“We have seen a stronger start to the year, with an increase in both shipments and selling prices,” Chief Executive Officer Lakshmi Mittal said in the statement. “This is expected to further improve in the second quarter as the underlying demand recovery continues. We remain confident that 2011 will be a stronger year than 2010.”

Aditya Mittal, chief financial officer, said that while guidance for the second quarter was “good,” steel volumes may decline in the second half of the year.

“The guidance is good for the second quarter as we’re expecting volumes to increase as the gradual underlying demand recovery continues and market sentiment improves,” he said on a media conference call.

Capacity Use

ArcelorMittal said use of capacity will rise to 80 percent in the second quarter from 75 percent in the first three months of the year. Shipments will also increase further in the quarter and price gains will “more than offset” cost increases, it said.

Average selling prices rose 7 percent in the first quarter from the last three months of 2010 and steel shipments climbed 4 percent to 22 million metric tons, ArcelorMittal said.

While the company gave no financial guidance for the second half, Aditya Mittal said that based on 2010, it sees steel volumes declining in the last six months of the year.

“On a seasonal basis, volumes in the second half are lower than the first half and we would expect a similar outcome in 2011,” the CFO said. ArcelorMittal also expects capacity use to peak for the year in the second quarter.

Interest Costs

Debt, which increased by $2.9 billion to $22.6 billion following the acquisitions of Baffinland Iron Mines Corp. (BIM) and G Steel Pcl (GSTEEL) and because of working capital costs, will rise further in the second quarter, the company said.

Interest costs in 2011 will be higher than last year’s $1.6 billion, Aditya Mittal said yesterday at the steel producer’s annual general meeting.

Iron ore costs increased 77 percent in the first quarter from a year earlier, according to Banco Santander SA, while coking-coal costs gained 68 percent after flooding in the northeast of Australia disrupted mining.

In an attempt to cope with higher costs and increase self- sufficiency in raw materials, ArcelorMittal said in February it planned to spend $1.4 billion on mine capital spending in 2011 and boost iron-ore output by 10 percent. In 2010, the company’s iron-ore production grew 30 percent to 48.9 million tons.

Steelmakers face volatile prices after being forced to buy iron ore and coal for immediate delivery or in quarterly supply accords following the collapse of a decades-old annual pricing system. ArcelorMittal, formed by the takeover of Arcelor SA by Mittal Steel Co. in 2006, said in November it would welcome a return to annual pricing because of the difficulty of predicting costs and passing them on to customers.

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

To contact the editor responsible for this story: Amanda Jordan at ajordan11@bloomberg.net