Arcelor: These are testing times for ArcelorMittal. The world's largest steelmaker looks set to have a gloomy second half, making it harder for this economic bellwether to meet some of its targets.
Holidays typically make the second half weaker than the first for steelmakers, but this year unexpected economic factors will compound the seasonal lull. The recovery continues, but ArcelorMittal's now expects third quarter Ebitda to be 4-20 per cent less than the $2.6 billion average of analyst expectations. The industry, and its leader, faces two challenges.
First, China, which consumes about 50 per cent of global steel supply, is not growing as fast as previously expected. The rate of increase in industrial production in China fell from 18 percent in March to around 13 per cent in June. The government is also clamping down on lending, so a further slow-down is likely.
Second, global steel restocking has also virtually ground to a halt. The steel replenishment cycle after a severe downturn typically lasts nine months, so it was originally expected to end in August. Yet nervous buyers are holding back. The inventory rebuild could be so slow that some of the demand boost will be delayed into 2011.
The relatively weak demand – and higher raw materials cost – will make steelmakers struggle to meet their earlier targets. ArcelorMittal forecast capacity utilisation, the level at which its plants operate, will fall to 70 percent in the third quarter -- well short of the company’s hoped for 80-85 percent for all of 2010. Ebitda margins, which rose over three percentage points in the quarter to almost 14 per cent, will suffer.
ArcelorMittal shares only dropped one percent on the disappointing outlook. Perhaps investors were softened by announcement that a spin-off of the stainless steel business is under consideration. The unit generated six per cent of total Ebitda in the quarter and could be worth as much as $4.5 billion standalone, slightly more than within the company.
When the industry looked stronger, ArcelorMittal predicted a 10 per cent increase in global steel demand in 2010. The steelmaker stands by that forecast, but it now looks like a close call.
