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ArcelorMittal’s upbeat outlook not reflected in domestic steel makers

ArcelorMittal’s upbeat outlook not reflected in domestic steel makers
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First Published: Fri, May 13 2011. 12 33 AM IST
Updated: Fri, May 13 2011. 12 33 AM IST
ArcelorMittal’s earnings for the March quarter were better than expected and it is confident of a good performance in the June quarter. The global steel maker’s outlook should provide some cheer to investors in Indian steel makers.
The company expects steel consumption to rise by 6.5-7% in 2011, after rising 14% in 2010, with North America leading growth at 9.5-10%. China’s growth is expected to slow to 7%, while the European Union is expected to grow by 5.5% and the rest of the world by 5-5.5%. China’s growth is expected to be slower as the country attempts to cool down economic growth.
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ArcelorMittal expects earnings before interest, tax, depreciation and amortization (Ebitda) to increase to $3-3.5 billion in the June quarter, up from $2.6 billion in the March quarter. It expects capacity utilization to rise from 75% in the March quarter to 80% on rising demand and seasonal factors.
Costs, too, are expected to go up, as coal and iron ore prices have increased; but the firm expects steel prices to rise enough to compensate for that. It said price increases during the quarter will be reflected in spot sales of steel. Cost increases will flow in much later due to a timing effect, as higher spot market prices of coal and iron ore are reflected in the contracts entered into in subsequent quarters. But the firm’s assessment is not without risk. While it struck a confident pose, Australian steel maker BlueScope Steel Ltd lowered its guidance, citing a fall in steel prices in April as one of the reasons for the change.
Domestic steel makers have been under fire from investors. Between January and now, the Sensex has lost about 10%, while Tata Steel Ltd has fallen by 16% and JSW Steel Ltd by 23%. Steel Authority of India Ltd’s results reinforced the perception that price realizations are not sufficient to cover rising costs.
Investors will also be concerned by rising interest rates. This may not affect the long-term debt situation for firms, but it will affect fresh project finance. Though the immediate impact will be on working capital finance, which has increased due to rising input costs, and now will become more expensive due to rising interest costs. Demand does not appear to be an issue for the moment, but if inflation is to be brought under control, then demand will slacken at some point. That is a bigger risk.
ArcelorMittal’s guidance should be reflected in Tata Steel’s outlook as well. Tata Steel Europe (erstwhile Corus Plc) contributes nearly two-thirds to Tata Steel’s volume sales, and sells in similar geographies. But its profitability is more dependent on its domestic steel operations, which contributed nearly three-fourths to Ebitda in the December quarter. That perhaps explains why ArcelorMittal’s optimistic outlook for its global steel operations has been largely ignored by domestic investors. Falling commodity prices and rising interest rates appear to be bigger worries.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Fri, May 13 2011. 12 33 AM IST