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Steel Slows With Europe Setting Back ArcelorMittal: Commodities

February 02, 2012

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Feb. 1 (Bloomberg) -- Steel demand worldwide is growing slower than forecast, eroding profit at producers including ArcelorMittal and Tata Steel Ltd. and forcing investors to revise their 2012 outlook for the $430 billion industry.

Global use of the alloy will rise 4.5 percent this year, less than the 5.4 percent forecast in October by the World Steel Association, according to the median estimate of 14 steelmakers, analysts and traders surveyed by Bloomberg. Growth may be as low as 1.2 percent, according to Bloomberg Industries analysts.

The gain, the lowest in three years, is tempered by cooling economies in China and Europe, where orders for steel products for houses, cars and machinery are stagnating and will keep the alloy’s prices and overseas shipments muted, analysts said.

“I’m bearish on Europe’s demand outlook in view of the negative impact from budget deficits and the debt crisis,” said Helen Lau, an analyst with Hong Kong-based brokerage UOB Kay Hian. “China is maintaining its tightening stance on the private property market and developers are still suffering from tight bank credit and high inventory” of homes.

ArcelorMittal may report a profit of $157.6 million in the three months ended Dec. 31, its worst quarterly earnings in a year, according to the mean of five analyst estimates compiled by Bloomberg. Tata Steel, including its European unit, is expected to report a 3.3 billion-rupee ($67 million) net income in the same period, the worst fiscal third-quarter numbers in at least five years, according to the average of 23 estimates.

Shares of Luxembourg-based ArcelorMittal rose 1.9 percent to 15.67 euros as of 9:11 a.m. in Amsterdam. Tata shares rose as much as 2.2 percent to 460.50 rupees and traded at 459.50 rupees as of 1:42 p.m. in Mumbai.

Becoming Cheaper

Steel companies are forecast to become cheaper, with a price-to-earnings ratio forecast to decline to 8.5 times, from almost 13 times currently, according to data compiled by Bloomberg for the Iron/Steel index.

Prices of benchmark hot-rolled coils may average 5 percent lower at about $734 a ton in 2012, compared with about $772 last year, calculations based on Steel Business Briefing data show.

Steel production in China, which accounted for about 46 percent of the global total in 2011, fell in each of the six months through November before gaining in December, according to the World Steel Association, the Brussels-based trade group that promotes the steel industry.

The World Bank on Jan. 18 cut its global growth forecast by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown in emerging markets such as India and Mexico. The world economy will grow 2.5 percent this year, down from a June estimate of 3.6 percent, it said. The euro area may contract 0.3 percent, compared with a previous estimate of a 1.8 percent gain.

Furnace Closings

ArcelorMittal, the world’s biggest producer, said in October it would idle plants in France, Germany, Poland, Spain and Luxembourg and permanently shut its blast furnaces in Liege, Belgium, as demand wanes.

“Global economic conditions remain a concern with the euro zone facing difficult credit conditions and fiscal policy uncertainty,” Seshagiri Rao, group chief financial officer at JSW Steel Ltd., India’s third-largest producer, said in Mumbai. “Steel production last month fell below previous year’s levels, which means high cost capacities are being closed and there is a lower apparent steel demand.”

Chinese steel producers Angang Steel Co., the largest Hong Kong-listed Chinese steel mill, swung to a loss last year and Maanshan Iron & Steel Co., Nanjing Iron & Steel Co. and Aluminum Corp. of China Ltd. said on Jan. 30 that profit fell by more than half as China’s economy slowed.

Stock Performance

U.S.-based Steel Dynamics Inc. and Reliance Steel & Aluminum Co. are the best performers in the Bloomberg World Iron/Steel Index over the past three months. Australian steel mills BlueScope Steel Ltd. and Onesteel Ltd., battling a stronger local currency and rising costs, are the laggards.

ArcelorMittal missed analyst estimates with its third- quarter profit and said it faced volume and price pressures in the final three months of 2011. ThyssenKrupp AG, Germany’s largest steelmaker, will report “significantly lower” first- quarter earnings, Chief Executive Officer Heinrich Hiesinger said on Dec. 2.

“While Europe is trying to retrieve itself from the brink of a recession, China is aiming to cool demand,” said Niraj Shah, an analyst at Fortune Equity Brokers Ltd. in Mumbai. “China will be a wild card -- there are chances it may lower interest rates that may boost steel demand.”

Global demand climbed 15.4 percent in 2010, 6.5 percent last year and may grow 5.4 percent this year, the World Steel Association said in its Oct. 12 forecast. Consumption contracted in 2008 and 2009, according to the association’s 2011 Steel Statistical Yearbook.

Prices Falling

“It’s going to be a year of lower profits for most steel companies,” Peter Marcus, managing partner at World Steel Dynamics, said in an interview in New Delhi on Jan. 27, predicting demand may contract 2 percent this year. World Steel Dynamics, based in Englewood Cliffs, New Jersey, forecasts steel prices.

China’s economic growth may drop to 8.5 percent this year from 9.2 percent in 2011, according to the median of 15 economist estimates compiled by Bloomberg. Orders continue to remain weak in the world’s fastest growing major economy, according to a Macquarie Group Ltd. report last month.

“Unless China loosens its tightening on the private property sector, it will be hard for steel demand to grow at last year’s estimated growth rate of 8.5 percent,” Lau said.

China Growth

China’s gross domestic product grew 8.9 percent in the fourth quarter from a year earlier, the slowest pace in 10 quarters. The fourth straight quarterly slowdown in the world’s second-largest economy is adding to concerns global expansion is faltering, with the International Monetary Fund warning of near- zero growth in Europe.

The financial crisis in Europe will prompt the region’s steelmakers to cut output and import less iron ore next year, London-based marine consultancy Drewry Shipping Consultants Ltd. said on Dec. 19. Mills have begun to cut production and the full impact of the reduction will be seen in 2012, it said.

Standard & Poor’s downgraded nine European nations on Jan. 13, saying recent policy steps may prove “insufficient” to contain the fiscal crisis.

The global steel trade may fall as much as 5 percent in 2012 after rising an estimated 6.2 percent to 410 million tons in 2011, Phil Hunt, operations manager at London-based International Steel Statistics Bureau, said in an e-mailed reply on Jan. 23. Shipments from India may rise as local producers add capacities, Marcus said.

--Editors: John Chacko, Todd White

To contact the reporter on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net Andrew Hobbs at ahobbs4@bloomberg.net


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