ArcelorMittal Warns on Profit as Lower Iron-Ore Price Takes Toll--Update

By John W. Miller and Alex MacDonald 

LONDON-- ArcelorMittal Friday reported its first quarterly profit in two years as it finally reaped benefits from closing mills in Europe and a resurgent steel industry in the U.S.

At the same time, a sharp drop in iron ore prices caused the company to reduce its earnings forecast, underscoring how dependent the world's biggest steelmaker has become on mining for its profits. The warning helped shares to fall 3.6% to $14.67 at 1000 EDT.

Luxembourg-based ArcelorMittal swung to a net profit of $52 million in the second quarter compared with a net loss of $780 million in the same period a year earlier. It had not been in the black since the second quarter of 2012, when it made $959 million.

Since the financial crisis, it is spent $1.4 billion, mostly in Europe, closing mills and reducing its workforce. That process is over. "Asset optimization is done," Chief Executive Officer Lakshmi Mittal said in an interview.

And the U.S. and European economies "are starting to grow again," said Mr. Mittal, highlighting sectors such as automotive and construction. The company even forecast steel demand to grow more swiftly, by 5% to 6% in North America, than in China, which is seen as growing 3% to 3.5%. In Europe, it is expected to grow 3% to 4%.

ArcelorMittal's sales of steel in North America jumped 13.1% compared with a year earlier to $5.4 billion. In Europe, sales declined slightly, but earnings increased by more than 40% to $689 million. "Other than residential and public construction, the market's been strong in the U.S.," says John Packard, publisher of Steel Market Update. "Even private commercial construction is starting to get strong."

One part of ArcelorMittal that saw its profits decline was its iron ore mining business, which suffered from an expected decline in average iron ore price to $105 per ton from $135 last year. That caused the company to cut its full-year forecast for earnings before taxes and other costs to "more than $7 billion" from $8 billion.

Seeking independence from the pricing power of the big three iron ore mining companies--Vale SA, Rio Tinto and BHP Billiton PLP--ArcelorMittal has focused its investment budget on expanding its mining operations. Iron ore is the main ingredient in the making of steel.

It now runs iron ore mines in nine countries, in places as diverse as Arctic Canada, Minnesota, Ukraine, Liberia and Bosnia-Herzegovina.

Seven percent of its sales but over 20% of its earnings now come from mining. It mines around 65 million tons a year, so a $30 drop in the average iron ore price reduces profits by almost $2 billion.

Iron ore, because it only costs around $30 per ton to mine, is still more profitable than making steel. For example, in the second quarter, ArcelorMittal's margin for mining was 28%, compared with only 3.3% for steelmaking in North America. Investment in mining will continue, Mr. Mittal said. In the second quarter, even as prices dropped, it increased production 10.6% to 16.6 million tons.

The drop in iron ore prices will help the steelmaking side, but not as much as it shears away at the big profits the company's been making in mining, say analysts.

Mr. Mittal said the drop in iron ore prices was "not a surprise" but that it had come "sooner than expected." It was a consequence, he said of "oversupply, even in China, and there is more capacity coming into the market, and all three majors are continuing to produce in full."

The rebound for Luxembourg-based ArcelorMittal, which operates a large mill South of Chicago that supplies the Detroit auto industry, capped a surprisingly strong earnings season for companies with steel mills in the U.S.

Pittsburgh-based U.S. Steel Corp. on Tuesday said it had reduced its net loss to $18 million in the second quarter from $78 million in the same period a year earlier, and cost-saving initiatives would benefit the company by $435 million in 2014, up from a previous estimate of $290 million. Its stock market value soared by almost 20%. Last week, Charlotte-based Nucor Corp. reported a net profit of $147 million, or 46 cents per share, beating analysts' expectations.

In addition, West Chester, OH-based AK Steel Corp. and Fort Wayne, IN-based Steel Dynamics Inc., the third and fourth biggest U.S.-based steelmakers, sparked investor interest in July by buying mills from Severstal as the Russian steelmaker liquidated its U.S. assets.

Write to John W. Miller at [e-mail] and Alex MacDonald at [e-mail]

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