Further evidence that the global resources boom is well and truly punctured with the world’s biggest steel maker announcing further cuts to production and forecasting a sharper than expected slump in fourth quarter earnings.
ArcelorMittal, the world’s largest steelmaker is planning substantial cuts in production and in its debt as the slump in demand around the world forces it and its competitors to scale back on their ambitions.
It’s further confirmation that the global economy is sliding towards recession in 2009. Steel is still one of the key industries, especially in emerging economies. It’s an industry Australia has hitched its fortunes to and we are going to feel a nasty backlash for the likes of BHP, Rio and other groups next year.
The news of the cutbacks comes less than a week after the world’s largest iron ore group, Vale of Brazil, revealed plans to cut production by 10%, or around 30 million tonnes immediately.
Vale blamed a 20% drop in steel production in Europe, the US and Asia, where Arcelor is a major player.
The news will raise further questions about the lack of any production guidance from BHP Billiton and Rio Tinto
BHP shares jumped 8.5% yesterday in Australia as commodity prices picked up. They finished up $2.48 at $31.60. Rio shares rose $6.89 or 8.6% to $86.60.
Arcelor’s cuts come despite reporting a 29% rise in net earnings for the third quarter to $US3.8 billion for the three months ended September 30, compared with earnings for the third quarter of 2007 of $US3 billion..
Sales for the third quarter ended September 30 increased 38% to $US35.2 billion dollar from $US25.5 billion dollar in the same period a year ago.
The latest quarter’s performance came as it cut production at various facilities in Europe, the US and parts of Asia: it’s a sign of the still considerable impetus from the price rises earlier in the year.
Warning that the company’s fourth-quarter profits were likely to show a large fall, Lakshmi Mittal, chairman, chief executive and main owner of the company, said the company would cut output this quarter by up to 35% to try and put a base under prices.
The company said it would also pull back from its eight-year, $US35 billion expansion plan by chopping capex next year in half to around $US4.5 billion.
Capital investment this year will be about $US5.5 billion, down from a forecast $US7 billion.
The company says that in the past month, large steel users in sectors such as construction, vehicles and engineering have slashed their orders, causing steel prices to fall.
Reflecting this new environment, ArcelorMittal’s shipments in the fourth quarter are expected to be about 18.5million tonnes, down sharply from the 25.6 million tonnes in the third quarter.
"The current period of de-stocking requires that we make appropriate production cuts to seek to rebalance supply and demand and we are also accelerating efforts to pay down debt," Mr Mittal said in a statement accompanying the report, which was posted on its website.
"We have announced today strong results for the quarter with EBITDA of USD 8.6 billion. Looking forward, we have also announced necessary and responsible measures to ensure we are well adapted to the current environment."
That was barely in excess of the guidance issued at the June 30 half year report "to exceed EBITDA of $US8.5 billion.
But the steel giant slashed its earnings’ outlook for the fourth quarter this year due to increased production cuts.
The company said 4th quarter EBITDA "guidance to be in the range of $2.5 – $3. 0 billion," more than 60% less than the figure for the third quarter. That will be less than the actual EBITDA for the 4th quarter of 2007 of $US4.8 billion.
The company blamed the cut on "increased production cuts following expected weaker demand across all segments as a consequence of the current credit and economic environment."
To meet the changing global steel environment, ArcleorMittal revealed that it was changing its growth plans, boosting cost savings from $US4 billion to $US5 billion over the next five years, increasing production cuts to cut unsold stocks of steel and lifting its debt reduction target to $US10 billion by the end of next year.
Chairman and CEO, Lakshmi Mittal said in the earnings statement that:
“We have announced today strong results for the quarter with EBITDA of US$8.6 billion.
"Looking forward, we have also announced necessary and responsible measures to ensure we are well adapted to the current environment. Our focus remains on cost-leadership and service to customers.
“The current period of de-stocking requires that we make appropriate production cuts to seek to rebalance supply and demand, and we are also accelerating efforts to pay down debt.
"ArcelorMittal, with its diversified business model, strong cash-flow and cost leadership position, is well placed to weather the challenging economic environment we currently face.
"We remain optimistic about the industry’s medium-term growth prospects, but it is appropriate to pause our growth strategy until we have a more settled economic outlook."
The company bought a 20% stake in Macarthur Coal earlier in the year. Its losing money on that investment, but it was bought for strategic reasons. Macarthur is the world’s largest supplier of coal for Pulverised Coal Injection into blast furnaces. It’s a way of using cheaper quality coking coal and getting maximum energy value out of it.
