ArcelorMittal (MT)
Q2 2008 Earnings Call Transcript
July 30, 2008 5:30 a.m. ET

Executives

Lakshmi Mittal – Chairman & CEO
Aditya Mittal – Chief Financial Officer

Good day and welcome to ArcelorMittal second quarter 2008 results. Today I’m joined by my GM and colleagues, Gonzalo Urquijo, Michel Wurth, Aditya Mittal and Christopher Cornier. If you look at the agenda for today we’ll provide you an overview of second quarter. We’ll talk about safety, investment plan progress. We’ll give you a view on the environment of the steel market and details of the Q2 results, divisional highlights, M&A activities and guidance for the third quarter. Before I begin I wanted to comment on our strong second quarter performance. As you recall when we provided guidance last quarter, we gave a minimum of $6.5 billion of EBITDA with no upside range. We exceeded our internal forecast for several reasons. First, cost increases were only partially realized during the quarter while price increases impacted earnings faster than we anticipated. Further we had excellent results from all of our business units and are also enjoying the full benefits of the synergies impact. Clearly ArcelorMittal is demonstrating the strength of its superior business model based on our three dimensional growth strategy. We have advantages compared to our competitions along with the value chain and most notably with respect to our raw material integration which is our key differentiating factor.

We’ll begin with safety which remains a key focus for the company. For the quarter our frequency rate improved slightly and we continue to strive for continuous progress in this area. Operationally as I said, we are very pleased with our record second quarter results which is up 60% as compared to Q1, 08. We continue to invest in the company with $1.4 billion of CapEx in Q2. This amounts to total investment of $2.4 billion in first half of this year. Although CapEx has been lower so far due to normal seasonal factors and we are still committed to $7 billion for the year 2008. We’ve also completed several M&A activities which are in line with our three dimensional strategy and we will hear the details going forward.

For the second quarter we are very happy to give you the expectation to exceed $8.5 billion of EBITDA. We’ll discuss health and safety, our performance and investment plan program. Overall as I said our health and safety performance improved slightly during the quarter. In early June, we signed a new and ground breaking agreement with various unions that is The European Metals, International Metals and USWA representing our employees across the globe aimed at further improving health and safety standards throughout the company. This was the first agreement of its kind in the steel industry and it recognizes the vital role by trade unions in improving health and safety.

Next we’ll discuss about the projects that we completed during the second quarter as well as those we expect to be completed by the end of 2008. Before giving more details about our CapEx in Q2, I’d like to highlight that we are currently facing very strong inflation in steel investment which is likely to lead to an increase to our growth plan and greenfield CapEx. We are currently reviewing the situation and we’ll update you soon. Now during quarter 2, we’ve listed out all the projects which we have completed. In this slide you can see projects which we have completed in Q2 and projects which are expected to be completed in Q3, like what we have completed in New Rolling Mill in Rodange, startup on the integrated plant in Bosnia, new rolling mill in Poland and new bar mill in Kazakhstan and for additional projects which we expect to complete in 2008 like revamping arc furnace in Luxemburg, startup of new DRI plant in South Africa, 2 million ton bulk iron ore mining in Mexico and others.

Before looking at the steel market trends in the major geographical regions I’d first like to provide a few comments on the market concerns to the global economy. The credit crunch, rising inflation and restrictive monetary policy may impact global steel demand. Developed world economies are likely to stagnate but may emerging economies could also see their growth impacted. Global steel demand will grow as per our estimates only 3% to 5% in the coming year. If we look at…if we even plan and try to do a scenario of planning where we believe that where we try to portray that what could be….if we take a very pessimistic view of what could be the demand growth, it comes out to be between 3% to 4% and if we take a much more realistic scenario it comes our about 5%. In our pessimistic scenario we’ve even slowed down the growth of 13% in China to between 5% and 8% and in emerging markets also were reduced to 5% even after doing all this scenario planning we come to 3% growth in which case the global developed economy will reduce by 1%. So, even if you take 3% to 5% growth in steel demand it represents a real challenge for the steel industry which is today running at full capacity. This means that every 12 months 50 million to 70 million tons of additional capacity will be needed.

Company rising costs and delays to get the steel making equipments for example some of the equipments deliveries the waiting list is more that 2.5 years. The steel market will remain structurally tight and constrained by supply. In addition to structural supply constraints, rising steel input costs will not allow price to decline. Marginal production costs for hot rolled coil based on today’s raw material costs is about $1000 per ton, and a reduction in raw material costs, very unlikely. The iron ore market is already consolidated and coal market is already tight. Although the pricing dynamics remains very strong our contract negotiations with our long-term customers are going well and we anticipate a healthy increase to our total contract for the year 2009.

Now we are looking more specifically at China. Demand today remains robust. Fixed asset investment growth was up for the second half. We are more cautious but predict that steel consumptions would continue to grow at a good rate. Fundamentally the domestic economy remains strong with record domestic consumption, low real interest rates and continuing infrastructure. The steel production growth in China was up 11.5% in June but continues to lag demand growth remaining well below growth rates of the last 7 years. Underlying capacity expansion slowed down, Olympic rated production cuts and electricity shortage should again cap supply growth in second half. In terms of inventory after three month peak over (inaudible) as anticipated we are seeing a rapid reduction with a 27% decline in the stocks between February and early July in 25 main cities. Export rose in second quarter because it was slow in first quarter. However there was a slight unexpected decline in the month of June and most exports are steel directed towards South East Asia and Middle East where the market has been strong. Although domestic prices have increased by more than $230 per ton since the end of last year, pricing remains real global prices. With the recent raw material settlements and overall inflation we should expect more upward pressure on pricing in the second half of the year.

Now, let me talk about US, while underlying an apparent demand or decline with continuing weakness expected in the second half of 08, the steel prices have increased significantly. Further price increase has been announced for September. This increase reflects slowing inventory levels both on an absolute basis and in terms of monthly consumption due to a continuing decline in imports. For the first five months of the year imports were down by 11%. For the second half of the year despite weak demand, we continue to believe that prices will remain strong as global capacity constraints will not allow import levels to change significantly. Continuing let us talk about Europe. Underlying steel demand is still growing despite some weak markets like Spain, the UK and Ireland. Real demand growth in the second quarter was good at 2.4% positive. For the second half we anticipate some slow down in demand. However demand should remain in positive territory as markets are expected to remain solid for the new EU 12 nations and for the non residential construction in Germany. On the supply side the market is still constrained yet stable with production down less than 1% since the beginning of the year. Additionally imports have been low, inventories are also remaining low. Pricing in Europe is strong as another price increase for September has recently been announced. We expect that low supply combined with continuing stability in inventory and imports will support pricing.

Stainless Steel contrary to Carbon Steel is not experiencing the same structural supply constraint and is facing a wait and see phase primarily due to the decline in Nickel prices and rising Asian imports. In Europe apparent demand improved in second quarter but inventory increased from 58 days to 75 days which remains feasible though but due to strong production increase and imports. Between January and May Asian Stainless Steel imports in Europe increased by 80% to represent cent percent of the total demand of EU 27. Real demand in stainless steel which grew by 4% in first half is expected to remain satisfactory but base prices have started to decline and could continue to do so in short and medium-term.

With this I hand it over to Aditya Mittal to walk you through the financial details.