Coal Undercuts ArcelorMittal’s Best Quarter in Two Years

  • Top steelmaker says profitability will fall in final quarter
  • Earnings have been buoyed by higher iron ore and steel prices

Coal’s dramatic rally this year is pouring cold water on ArcelorMittal’s best earnings report in two years.

The world’s biggest steelmaker is benefiting from higher steel prices after China’s economy stabilized and policy makers around the world pledged to back growth. But expensive prices for coal, one of the main ingredients to make steel, will soon start cutting into earnings, the company said on Tuesday.

“We were all surprised by the rapid and unexpected rise,” Aditya Mittal, chief financial officer of ArcelorMittal, said in a call with reporters. “We do expect the increase in raw material prices to be reflected in steel prices, but in the interim there will be negative impacts.”

The stock sank 6.4 percent to 5.74 euros as of 10:55 a.m. in Amsterdam for the biggest intraday loss since June. The shares almost doubled in value this year as deep cost cuts paid off and raw-material prices rebounded.

See also: Analysts See Progress, Some Short-Term Pain

ArcelorMittal reported earnings before interest, taxes, depreciation and amortization of $1.9 billion for the third quarter, 40 percent more than a year earlier. That compares with an average estimate of $1.95 billion from nine analysts surveyed by Bloomberg.

The company cautioned that profitability will fall in the last three months of the year amid a decline in U.S. steel prices and a surge in coking coal. Prices of hot-rolled coil, a benchmark product, have fallen 25 percent since hitting a two-year high in May.

Chinese Miners

Chinese President Xi Jinping’s administration earlier this year ordered mining companies to lower coal output in an effort to revitalize the industry and give a lifeline to the country’s miners, many of them government-controlled. Authorities have now started to fine tune the output policy, allowing some miners to increase production. Hard coking-coal prices jumped 7 percent Monday to $289.30 per ton.

ArcelorMittal said the damage to earnings may be short-lived as the industry uses the rise in costs to boost steel prices. The company uses about 35 million tons of coking coal a year and mines about 6 million tons to 7 million tons.

“We are protected, but to a small degree,” Mittal said. “We are comfortable that the cost will be passed on, however there is a timing issue.”

Sales declined 6.8 percent to $14.5 billion in the third quarter. Ebitda per metric ton of steel jumped 46 percent to $83, ArcelorMittal said. 

The company reported steel production of 22.6 million tons and iron-ore output of 13.7 million tons. Net debt fell to $12.2 billion from $12.7 billion at the end of June.

The steelmaker also said governments around the world need to take action against cheap Chinese imports that undercut domestic industry. It called for a “comprehensive trade solution” that protects more types of steel and fewer Chinese imports that arrive via other nations.

”We still need to tackle the issue of overcapacity in the steel industry in China. There’s some progress, but not enough,” Mittal said, citing the impact of Chinese intervention in the coal market. “They have the tools, but perhaps they’re not acting as aggressively as they should in the steel business.”

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