Cost cuts help ArcelorMittal defy profit warning fears

ArcelorMittal, the world's largest steelmaker, defied fears of a profit warning on Friday and kept its earnings forecast for this year, helped by deep cost cutting in Europe.

Shares in the firm, which makes six-seven per cent of global steel, jumped as much as 7.5 per cent after it posted a smaller-than-expected fall in first-quarter core profit and said the cost savings and its mining activities would help earnings improve in the months ahead.

The $500-billion-a-year steel industry, a gauge of the global economy, has been hit hard by a drop in demand from austerity-ravaged Europe and signs of slowing growth in China.

ArcelorMittal said European steel demand was almost 30 per cent below peak 2007 levels and set to fall further in 2013.

Steel shipments at its Flat Carbon Europe division, which mainly serves the automobile  market, were 16 per cent higher in the first quarter than in the final three months of 2012, but still eight per cent down year-on-year.

Auto sales in the first quarter fell 10 per cent, although improved in April.

However, the division sharply narrowed its operating loss, partly from its idling and closing of European facilities set to save $1 billion, and also thanks to another $3 billion savings plan to restore steel margins to pre-crisis levels by 2015.

“There is evidence that the programme is having a tangible effect,” said Neil Sampat, steel analyst at Nomura.

ArcelorMittal, which lost its investment grade credit rating last year, has sold assets, raised $4 billion via a rights and bond issue and cuts its dividend to steady its finances.

It has already saved $4.8 billion in sales and administrative expenses since 2008.

The group also expects to ship about 20 percent more iron ore this year, with the ramp-up of production in Canada, pointing to benefits from its deeper push into mining.

Better than feared
ArcelorMittal, which sold around 45 per cent of its steel in Europe last year, said first-quarter earnings before interest, tax, depreciation and amortisation (Ebitda) fell 26 per cent year-on-year to $1.56 billion, well above analysts' average forecast of $1.36 billion in a Reuters poll.

It said Ebitda, or core profit, would be higher in the second quarter than the first and repeated its outlook that the figure would be greater this year than the $7.1 billion reported in 2012.

Market expectations have sunk since the start of the year. The SmartEstimate of Thomson Reuters Starmine, which weights analyst estimates according to previous track record, is for a core profit of $6.89 billion. The mean figure was $7.17 billion.

ArcelorMittal did add a caveat to its forecast, however: that it was assuming iron ore prices and the margin of steel over raw material costs would be similar to 2012 levels.

The company, formed in 2006 when India-born Lakshmi Mittal's steel business bought European peer Arcelor, revised up last year's core profit figure due to an accounting change. Chief Financial Officer Aditya Mittal said ArcelorMittal was indicating its underlying earnings would be higher year-on-year.

Reduced hopes of an economic recovery in Europe this month led German steel maker Salzgitter AG to cut its 2013 guidance and distributor Kloeckner to warn its profit goal was unrealistic.

At 1050 GMT, ArcelorMittal's shares, which had dropped 24 per cent to date this year, were up 6.6 per cent at euro 10.33, among the biggest rises by a blue-chip European stock.

The group sees steel shipments rising two per cent in 2013, driven by a three per cent rise of global steel consumption. The company believes all regions except Europe will demand more steel than in 2012.

BEATING THE TREND

• The company is betting on cost savings and mining activities to improve earnings
• Steel shipments at its Flat Carbon Europe division were 16 per cent higher in Q1 than in the final three months of 2012
• ArcelorMittal has sold assets, raised $4 billion via a rights and bond issue and cut its dividend to steady its finances
• It has already saved $4.8 million in sales and administrative expenses since 2008