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By Jeremy Glaser | 02-08-2011 04:25 PM

Three Positive Signs for ArcelorMittal

Three recent developments leave steel producer ArcelorMittal well-positioned to thrive, says Morningstar analyst Bridget Freas.

Jeremy Glaser: For Morningstar I'm Jeremy Glaser. I am here today with Bridget Freas. She is an Equity Analyst at Morningstar and we're going to take a look at her three thoughts on ArcelorMittal.

Bridget, thanks for joining me today.

Bridget Freas: Thank you.

Glaser: So Arcelor just reported earnings. Can you talk to us a little bit about what their earnings report showed and what their outlook for the future is?

Freas: Sure. Well, as we expected, they reported a pretty rough fourth quarter which has been the case across the board with most steelmakers. Input costs were really high, especially towards the end of 2010 and that really created some margin compression. But they had a very bullish outlook, particularly for the first half of the year.

We've seen steel prices come up 50% or more, particularly in the U.S. in the recent weeks. They guided to much better capacity utilization for the first quarter which is an indication of end market demand improving. They said they expect steel consumption to increase 7% overall for 2011. But they were very cautious on any guidance for the latter half of the year, which we actually think is a positive for the stock because there is a lot of uncertainly in the market right now.

The way we've seen steel price cycles shorten, raw material costs volatility, end market demand has been spotty at best, so I think there is something weighing down the stock related to a lot of uncertainty in the latter half of the year. But we actually think that ArcelorMittal is one of the better positioned companies to perform in that type of environment.

Basically that's speaks to their geographic and end market diversification, their raw material flexibility, which is the use of scrap metal and iron ore and coking coal for their steelmaking and their captive raw materials sources, they are expecting to increase their own iron ore production by 10% in 2011.

Glaser: One of their big pushes into having more iron ore production was taking a big stake in a Canadian mining firm. Can you talk a little bit about that mine and if you think that's going to impact the business at all?

Freas: Sure. Yes. This is definitely another thing that I think is a positive for the Company, especially over the long-term. As I mentioned raw material costs have gone up tremendously. This has been a big concern for the company. They have definitely stressed their need to source more raw material internally.

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