ArcelorMittal set to revise full-year guidance in Q2 results, analysts say

Global steel major ArcelorMittal is expected to lower its full-year guidance on earnings, despite generally positive second-quarter 2014 results, analysts told Steel First this week.

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The steelmaker’s results statement for April-June is due to be published on Friday August 1, with changes expected to the $8 billion full-year guidance figure announced in February, analysts said.

ArcelorMittal’s 2014 earnings before interest, taxes, depreciation and amortisation (Ebitda) could fall to $7-7.5 billion because of low iron ore prices and profitability concerns in North America, they added.

“The group always said that the Ebitda guidance was valid at an average iron ore price of $120 dollars, and now it is at least $15 dollars below that level,” Carsten Riek, a steel industry analyst at UBS, told Steel First.

Spot iron ore prices tumbled to a two-year low of $89.48 per tonne cfr Qingdao on June 16 as oversupply and credit-tightening issues in China weighed on the seaborne market.

Metal Bulletin’s daily index for 62% Fe material averaged $103.02 per tonne cfr in the second quarter, down from $120.55 per tonne cfr in the first quarter of the year.

“Besides the low iron ore prices, it is worth remembering that ArcelorMittal’s profitability in North America has been penalised [by] harsh weather conditions and higher energy costs,” JP Morgan analyst Alessandro Abate said.

Q2 expectations
The general mood at ArcelorMittal’s second-quarter results presentation was expected to be positive despite a potential lowering of the full-year guidance, analysts said.

Sell-side analysts’ consensus forecast for the second-quarter results published by the steelmaker on July 22 was $1.85 billion, up from the realised $1.75 billion in January-March 2014.

“It is an improvement quarter-on-quarter,” Riek said, “but it is not significantly better because of the refurbishment cost of one of [ArcelorMittal’s] US blast furnaces.”

If confirmed, the figure will also represent a significant improvement year-on-year for the steelmaker, compared with Ebitda of $1.7 billion in the second quarter of 2013.

ArcelorMittal’s results were not expected to be significantly affected by the current uncertainty in Ukraine. Even assuming any disruption to output, the company could still replace missing Ukrainian material with product from other group plants, Abate added.

The steelmaker’s net financial debt was expected to be around $17.8 billion, according to Abate, down from $18.5 billion, mostly because of working capital reductions, which were set to continue into the second part of the year.

Europe margins
The key issues to focus on in the second half of the year were the evolution of the iron ore price and ArcelorMittal’s earnings progression in Europe, where many mills have managed to boost margins and improve pricing power in the face of falling iron ore prices.

“ArcelorMittal’s second-half steelmaking margins should benefit from resilient US and EU steel pricing and the recent decline in raw material costs,” analysts at Macquarie said in a research note.

Lower iron ore price volatility was also expected to boost the company’s outlook.

“ArcelorMittal’s and steelmakers’ margins are set to gradually expand on sequentially stronger utilisation rates as the economy improves,” Abate said.

“The lower iron ore price volatility will reduce its negative effect on steel price negotiations throughout the steel cycle, and contribute to shift pricing power back to steelmakers, which is something we see emerging from around the end of 2015/beginning of 2016,” he added.

Asset optimisation, achieved by reallocating workload across the steel major’s most efficient mills, alongside a low level of imports in Europe, were cited as further positive factors.

Analysts will also be looking for additional clues about ArcelorMittal’s interest in Italian steelmaker Ilva in the second-quarter results presentation.