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 john.miller@wsj.com and Alex
MacDonald at alex.macdonald@wsj.com
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