European Steelmakers Crimped By Slowdown
08/14/2012| 04:56am US/Eastern
--Steelmakers hit by construction slump in southern Europe
--Earnings decline sharply in the second quarter
--Order intake muted, but some signs of hope for coming months
FRANKFURT--European steelmakers see muted business prospects after sharply falling earnings in the second quarter, damped by the sovereign debt crisis and slowing demand from China.
ArcelorMittal (>> ArcelorMittal), ThyssenKrupp AG (>> ThyssenKrupp AG) and most recently Salzgitter AG (>> Salzgitter AG) have reported that conditions, including a construction slowdown in southern Europe, weighed on performance.
"The weak economic situation and in particular the general uncertainty resulting from the unresolved sovereign debt crisis are increasingly impacting our markets," said ThyssenKrupp Chief Executive Heinrich Hiesinger.
ArcelorMittal's chief executive made similar remarks. "The global economy remains fragile," said Lakshmi Mittal, and "the situation in Europe and its potential impact on other markets remains the biggest concern."
The world's largest steelmaker cut its forecast for global apparent steel demand to a 3.5% to 4% rise this year, down from its earlier prediction of a 4% to 4.5% increase. ArcelorMittal now sees a 3% to 5% contraction in Europe as construction demand in the highly indebted south of the continent remains depressed.
The Luxembourg-based company has also cut its forecast for Chinese steel consumption, but has become more optimistic for U.S. demand due to recovering residential construction.
The weak demand weighed on sector earnings. ArcelorMittal's second-quarter net profit fell 38% on the year, prompting Standard & Poor's to cut the company's credit rating below investment grade. Tuesday, Salzgitter said it swung to a net loss.
Customers were reluctant to place orders amid economic uncertainty, boding ill for the coming months. ThyssenKrupp's order intake declined 21% on the year, "somewhat concerning" and implying weak revenue in the next quarter, according to Warburg Research analyst Bjoern Voss.
The situation has been deteriorating over time, reported Salzgitter. "The willingness of many steel customers to place orders weakened rapidly in the face of deteriorating economic conditions' at the end of the second quarter, and "implementing the selling price increases so urgently needed was therefore not possible," said the company.
While there are few real indicators pointing to an overall recovery for the sector, some managers and analysts retain hope for improvement in the coming months.
Mr. Mittal said demand from China, the world's largest steel-consuming nation, should pick up in the second half of the year as the government takes steps to stimulate the economy through investments in railway infrastructure among other things.
Morgan Stanley in a recent research report also noted signs of a demand recovery in China and pointed to a rebound in property sales, rising spending on infrastructure investments and surging car sales.
Salzgitter has hopes also for Europe. As orders have been very low recently, it "appears feasible that the fall may bring a recovery in demand and the implementation of urgently needed price increases," said the company.
JPMorgan analyst Alessandro Abate confirmed this view, saying "the global steel price trend is shaping up."
The devaluation of the euro against major currencies is also helping, said Salzgitter. And regarding earnings, not only selling price increases but also declining raw materials prices might help margins, said the company.
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