Vallourec Second-Quarter Profit Declines 11% on Rising Costs

Vallourec SA (VK), a French producer of steel pipes for the oil and gas industry, said second-quarter profit fell 11 percent as rising raw material costs cut margins.

Net income dropped to 112 million euros ($161 million) in the three months ended June 30 from 126 million euros a year earlier, Vallourec said in a statement. The result missed the 135.5 million-euro average estimate of four analysts surveyed by Bloomberg. Sales rose 15 percent to 1.29 billion euros.

The result reflects “the strong increase in raw material costs which we are progressively recovering in our sales prices,” Chairman Philippe Crouzet said in today’s statement. The company “will continue to operate in a context marked by the volatility and high level of raw material costs as well as the strengthening of the euro against the dollar.”

Gains in raw-material costs have hobbled steel product makers’ efforts to emerge from the industry’s worst crisis in 60 years following a collapse in demand after the world financial crisis. Prices for iron ore, the key steelmaking ingredient, may average $170 a metric ton in 2011, up from $122 a ton last year, according to Morgan Stanley.

Margins will be hurt by a rise in costs of raw materials until the end of the year when price increases to clients will begin to compensate, said Chief Financial Officer Olivier Mallet. “Price increases will be progressively put in place.”

Vallourec, based in Boulogne Billancourt, France, said sales will increase in the second half and second-quarter profit was 37 percent higher than the first quarter.

Sales will be “significantly higher” this half compared with the same period last year, said Mallet.

“Vallourec is in a transition and deep transformation phase,” he said. The company is putting in place local production units, such as its venture in Brazil, and is “confident” of future demand from the energy industry and for “premium products,” he said.

To contact the reporters on this story: Jesse Riseborough in London at jriseborough@bloomberg.net; Tara Patel in Paris at tpatel2@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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