ArcelorMittal Expects Pressure From Iron Ore Prices -- Update

By Alex MacDonald 

LONDON-- ArcelorMittal, the world's largest steelmaker by output, is banking on growth in auto makers' demand for steel to help mitigate rock-bottom iron-ore prices this year after reporting a narrower net loss in the fourth quarter.

The Luxembourg-based mining and metals group said on Friday that its net loss fell to $955 million in the fourth quarter compared with a net loss of $1.23 billion in the same period a year earlier, despite around $1 billion in charges related to asset impairments and currency exchange losses. They included a $621 million write-down at Chinese steelmaker China Oriental Ltd, where it owns a significant minority stake.

"Operating conditions remain tough [but] we expect steel markets to continue to improve, particularly for high value-added products such as automotive," said Lakshmi Mittal, chief executive of the family-controlled steelmaker.

ArcelorMittal's mining division, typically a reliable source of profit, turned in an operating loss last quarter following a 45% decline in iron ore prices which more than offset record high iron ore output. Falling iron-ore prices generally boost a steelmaker's profit margins by lowering steelmaking costs but in the case of ArcelorMittal, it also dents its mining business' profits. ArcelorMittal is one of the world's largest iron ore producers, selling nearly two thirds of its output at market prices to other steelmakers.

The iron-ore price drop largely offset the rewards of several years of cost cutting, particularly in Europe where it has closed loss-making mills in recent years to cope with excess steel production and anemic demand. The European steel division became the company's largest earnings driver before depreciation costs in the fourth quarter, posting its fourth consecutive quarterly profit after a year and a half of restructuring-impaired losses.

ArcelorMittal plans to generate between $6.5 billion and $7 billion in earnings before interest, taxes, depreciation and amortization this year, after generating $7.24 billion last year, up 5.1% on year and slightly ahead of analysts' expectations. ArcelorMittal's Chief Financial Officer Aditya Mittal said the guidance is based on current steel and iron ore spot prices, the latter of which is languishing at more than five and a half year lows.

Arcelormittal plans to boost total steel shipments by 4% to 5% this year, half of which will come from recent blast furnace restarts in Brazil and South Africa. It also expects to continue ramping up iron ore production, in line with other large miners such as Rio Tinto and BHP while cutting costs. This should help offset some of the iron ore price decline, but not all.

ArcelorMittal forecasts that global steel demand should grow about 2% to 2.5% this year, slightly lower than its estimated growth for last year. Steel demand in all of its key steel markets should rise by more than 1%, except for the Commonwealth of Independent States and the U.S.

Arcelormittal expects flat to 1% steel demand contraction in North America this year due to U.S. inventory destocking after a steep restocking period last year.

Nevertheless, the steelmaker expects limited steel shipment growth there due in part to strong automotive demand, the CFO said.

In the Commonwealth of Independent States, steel demand should contract by up to 6% due to the continuing fighting in Ukraine. But the steelmaker has largely circumvented weak demand there by shipping steel to customers in North Africa and the Middle East.

CFO Mittal said ArcelorMittal will continue to look at ways to optimize its portfolio of assets, as evidenced by the sale of its stake in a U.S. mill last year. The company, however, is open to mergers and acquisitions: it remains interested in purchasing privately-owned Ilva, Europe's largest steelworks, although the Italian government wants to restructure the business first before allowing it to be sold, the CFO said.

ArcelorMittal reaffirmed its plan to cut its net debt to $15 billion in the medium term, having reduce it to $15.8 billion as of December end, its lowest level since the merger of Mittal Steel And Arcelor in 2006.

Write to Alex MacDonald at [e-mail]

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