Brussels, 31 October 2011: Reuters

European steelmakers are braced for a weak end to the year after fears of recession that emerged in August transformed a seasonal dip in the third quarter into an extended slowdown. Weak developed markets, exacerbated by the eurozone debt crisis, and tight credit conditions in China, the world's biggest steel consumer and producer, have weighed on the sector, even if the costs of raw materials are falling.

The third quarter is typically a thin period for the $500 billion a year global steel industry, but U.S. and Asian producers have already forecast weak demand and prices stretching into the fourth quarter, when a pick-up might normally occur.

"I'm rather cautious on steel in 2012. I see lower demand from the automotive and construction sectors and only growth in engineering," said Ingo Schachel, analyst at Commerzbank.

ArcelorMittal , the world's largest steelmaker, reports earnings next Thursday, among the first European producers to do so. The company, which makes 6 to 7 percent of global steel, gives a profit outlook for the quarter ahead, the most keenly watched number for investors. The Luxembourg-based producer believes steel shipments and prices in the second half will be higher than at the end of 2010, when a sharp slowdown and margin squeeze drove it into a final quarter loss.

The company has more mining income to soften the blow this time, but analysts are still expecting core profit (EBITDA) to be lower in the fourth quarter than the third. Last month, it told investors it would weather a possible new recession better than in 2008/2009 because of savings made to date, a better balance sheet and its expansion into mining.

The cuts have already begun, with idled blast furnaces in Europe and plans to close permanently some Belgian operations. "ArcelorMittal's recent plans to consolidate its production footprint in Europe make sense, but the worry is that they will end up losing market share," said Neil Sampat, analyst at Nomura.

Steelmakers comparisons CHART

PROSPECT FOR IMPROVEMENT

The company lost share in 2008/2009, when as the biggest swing producer it cut output to some 50 percent of capacity. Sampat among European steelmakers he prefers ThyssenKrupp because of possible improvements at its U.S. steel business and because of its other more recession-resistant divisions such as for elevators and plant technology. Developed markets are sluggish at best so China, even if not a market for ArcelorMittal, will be crucial to the health of the sector. Evidence of a slowdown in there is mounting and Asian producers are already downbeat.

World number three POSCO gave a gloomy outlook with a decline in profit seen in the fourth quarter and steel prices falling until the first half of next year. Japan's Nippon Steel and JFE Holdings slashed full-year outlooks by about 20 percent on Wednesday.

U.S. producers such as Nucor Corp and U.S. Steel have warned of weak demand for the rest of the year and imports driving down prices, although the former has forecast a pick-up of orders early in 2012.

In Europe, Swedish specialty steel maker SSAB AB said on Friday it faced an uncertain outlook for prices and demand.

Ends --

Reuters - for Commodities Now