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Steelmakers expect soft patch to continue

ArcelorMittal (MT-N), the world's largest steelmaker, and United States Steel Corp. (X-N) forecast a sector soft patch extending to the end of the year with weak shipments and a margin squeeze.

Analysts were expecting a slight improvement from a poor July-September period when slowing growth in China combined with weak construction in the United States and thin demand in southern Europe.
The $500-billion steel industry US, a bellwether for the broader economy, profited in the second quarter from a strong auto sector and booming Chinese demand, but since then the latter in particular has cooled.

Iron ore and coal costs rose, but steel prices did not and globally the fragmented steel sector is running at around 70-75 percent of capacity.

Although spelling pain for steelmakers, it has been a boon for miners, which have profited from tight supply of ore, consolidation and the ability to push through price hikes at peaks late in the second quarter.

“Clearly this is the big news of this call, how the demand remains muted into the fourth quarter of this year,” ArcelorMittal Chief Financial Officer Aditya Mittal told a conference call.

The company, whose output is more than double that of its nearest rival, said shipments would pick up just slightly in the final three months, average steel prices would be lower than in the third quarter and iron ore and coal costs would be higher.

Shares in U.S. Steel, the world No. 11 last year, dropped in early trade after it said that activity in most of its markets had slowed from the second quarter and forecast lower shipments for its three main divisions in the fourth quarter.

U.S. Steel Chairman and CEO John Surma said current new orders reflected the uncertainty in North America and  Europe.
ArcelorMittal shares are 27 percent down this year, while U.S. Steel stock is down around 25 percent. In contrast miners BHP Billiton and Rio Tinto are up 10 and 21 percent respectively. The STOXX European basic resources index has gained 9 percent in the year to date.


The World Steel Association forecast earlier this month that the growth of steel demand would ease to 5.3 percent next year from 13.1 percent this after a 6.6 percent contraction in 2009.

Steel demand in the developed economies would remain below pre-crisis levels in 2011 with the effects of restocking and government stimulus packages now fading and a fundamental revival in corporate and consumer spending yet to be seen.

The association also sees a considerable slowing of growth to just 3.5 percent in China due to government efforts to cool the economy, but a 13.6-percent surge in demand from India.

In Europe, the north and Germany in particular were doing well, but demand was weak in the south, where ArcelorMittal has greater exposure than European competitors, such as Germany's ThyssenKrupp and Salzgitter.

They also produce more flat steel used principally for cars and relatively less long steel, used mainly in construction.
Rivals such as world number three POSCO and Nucor Corp have already reported lower-than-expected third-quarter results, the former cutting its 2010 forecast, the latter warning of uncertainty.

World No. 4 Nippon Steel will report quarterly earnings on Wednesday.


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