News Room - Steel Industry

Posted on 27 Apr 2010

Europe steelmakers await healthier Q2 after weak Q1

European steel companies, including global giant ArcelorMittal, are due to forecast improved earnings on climbing prices as they post lacklustre results hit by last year's downturn.

 

Investors pouring over results in coming weeks will be keen to find out how much sky-rocketing raw materials prices are being passed on to customers and the implications of a move to short-term pricing in iron ore and coal.

 

"The results should reflect a relatively weak first quarter and the outlook for the second quarter should be significantly stronger in terms of pricing and in terms of volumes picking up as well," said analyst Gavin Wood at Nomura International in London.

 

The $500 billion steel industry was hammered by the global recession, but a recovery has been speedier than predicted.

 

The World Steel Association forecast earlier this month that global steel demand was growing faster and sooner than expected, driven primarily by China, and was expected to reach pre-crisis levels this year.

 

European steel industry body Eurofer said on Monday the rebound was driven by restocking and that most steel-using sectors, except for construction, would show year-on-year growth again in the second quarter.

 

ARCELORMITTAL OUTLOOK

 

The world's top steelmaker ArcelorMittal is expected to post a modest decline in core profit when it reports first quarter results on Thursday, but unless forecasts are wide of the mark, the focus will be on the outlook.

 

ArcelorMittal, which has about 8 percent of the global market, has said shipments should be higher in the first quarter than in the October-December period but this would be offset by lower average selling prices and increased costs.

 

The group, which typically provides guidance for the next quarter when it issues its quarterly results, is expected to boost much-watched core profit, or earnings before interest, tax, depreciation and amortisation (EBITDA), by 40 percent in the second three months of this year.

 

"There will be a seasonal pick-up, with construction for example. Q2 is always the strongest quarter," said Andrew Snowdowne, analyst at UBS, adding the question would be how much of a boost ArcelorMittal saw beyond the seasonal bump.

 

Demand and spot prices increased from late December in the United States and elsewhere they rose from February.

 

World No.2 Nippon Steel of Japan will announce its full-year figures on Tuesday, and the world's third-largest producer, China's Baosteel, will report on Wednesday.

 

COLLAPSE OF BENCHMARK

 

ArcelorMittal, with three times greater output than Nippon Steel, is among the companies most exposed to spot steel prices. This could help it cope with the end of the annual benchmark system for iron ore and coal contracts by allowing it to pass on higher raw materials costs more quickly to consumers.

 

It is also more self-sufficient than its rivals, providing its steel production with some 60 percent of its own ore and 20 percent of its coal at the end of last year.

 

Analysts expect the impact of higher raw materials costs to be felt more in the third and fourth quarter.

 

Groups such as Germany's two biggest steelmakers ThyssenKrupp and Salzgitter -- both of which post interim results on May 12 -- are less vertically integrated and more exposed to raw materials price increases.

 

"The issue that will be of concern to everybody is what's going to happen in terms of the iron ore prices being passed on to customers," Wood said. "Spot prices (of iron ore) are still rising. So can they pass on cost increases when they are so significant? Is there a ceiling?"

 

Salzgitter said last week it would hike steel prices in the coming months to pass on the higher raw material prices to its customers.

 

ThyssenKrupp agreed to a doubling of iron ore prices last week and was the first European steelmaker to strike a supply deal for the material on a quarterly basis.

 

LOW-COST RUSSIAN PRODUCERS

 

Steel makers in Russia, the world's third-largest producing nation after China and Japan, saw their domestic operations return to profitability last year thanks to their position as a leading low-cost producer.

 

First-quarter steel output is expected to be higher across the board, after Severstal, Russia's largest producer, said on Monday crude steel output rose 25 percent year-on-year to 4.7 million tonnes.

 

Severstal is due to post first quarter results on May 15.

 

Evraz Group, Russia's second largest producer, also expects a stronger first quarter after posting a $1.26 billion net loss in 2009.

 

The company, part-owned by billionaire Roman Abramovich, expects first-quarter earnings before interest, taxation, depreciation and amortisation (EBITDA) of $400 million. It is due to report on May 17.

 

Companies that produce almost all of their steel at home, such as Magnitogorsk Iron & Steel Works and Novolipetsk Steel, have indicated more profits are in store this year.

 

NLMK earlier this month said it expected to post revenues of $1.65 billion in the traditionally weak first quarter, down from $1.82 billion in the fourth quarter.

 

MMK, one of the few Russian steelmakers that is not self sufficient in raw materials, cautioned that its first quarter results could dip after it posted a fourth quarter EBITDA of $670 million.