Brussels, New York, 27 October 2010

The world's largest steelmaker ArcelorMittal and two major American producers warned on Tuesday that the industry faces a fallow period at least through the end of the year with weak shipments and a margin squeeze.

ArcelorMittal expects a 25 percent lower fourth-quarter profit, while U.S. Steel and AK Steel see more red ink ahead as the stagnant economy stifles steel demand and raw material costs whittle away at steelmakers' bottom lines.

Steel shares plunged after ArcelorMittal's third-quarter core profit slid 25 percent from the previous quarter and the American producers posted losses and gave pessimistic forecasts for the rest of the year.

"U.S. Steel was just catastrophic," said analyst Charles Bradford, of Affiliated Research Group in New York. "I had expected a loss but was surprised by how significant it was. "Demand weakened and prices have weakened a lot recently."

James Wainscott, chairman and chief executive of AK Steel, which forecast a fourth-quarter operating loss, was blunt: "A stubbornly reluctant economic recovery and soaring raw material costs will continue to challenge us in the near term."

U.S. Steel Chairman and CEO John Surma told Wall Street analysts that steel production was at 70 percent of capacity in the third quarter -- down from 82 percent in the second, while steel shipments decreased by 6 percent.

But although fourth-quarter results for U.S. Steel's flatrolled business are expected to be as depressed as the third quarter, he expects steel demand to eventually pick-up.

"We still believe that long-term demand trends for U.S. steel consumption ultimately will probably return to something like normal.

"If the economics get lined up right ... then I think steel consumption should move back to where it traditionally has been over 20, 30, 40, 50 years," Surma said on a conference call.

The $500 billion steel industry, 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 said shipments would pick up only slightly in the final quarter, average steel prices would be lower than in the third quarter and iron ore and coal costs would be higher.

ArcelorMittal shares closed down nearly 5 percent in Amsterdam and were among the weakest stocks on the FTSEurofirst 300 index of leading European shares. Shares of U.S. Steel, the world No. 11 last year, were down 3.3 percent in afternoon trade in New York. AK Steel slipped 3.8 percent.

ArcelorMittal shares are down 27 percent 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.

EASING CHINA DEMAND

The World Steel Association has forecast the pace of steel demand growth would slow to 5.3 percent next year from 13.1 percent this year after a 6.6 percent contraction in 2009.

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. World No. 3 POSCO and Nucor Corp have already reported lower-than-expected third-quarter results, the former cutting its 2010 forecast, the latter warning of uncertainty.

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