European Weakness Hits ArcelorMittal's 4Q Results

 ArcelorMittal (MT) reported EBITDA of $1.71 billion for the fourth quarter, at the lower end of its implied guidance, but made better-than-expected progress on improving its balance sheet. Steel shipments for the fourth quarter fell 2.5% sequentially and EBITDA per ton declined to $83 from $114, but the company believes that quarter will be the trough despite continued concern regarding economic conditions in Europe. Guidance for first-half 2012 shipments in line with the year-ago period and EBITDA above the second half of 2011 implies that the first quarter should show sequential improvement. Management believes Europe will see a slight decline in steel demand for 2012 but this will be balanced by continued growth of around 5% in the rest of the world. While all segments experienced a sequential decline in profitability, mining continues to be the strongest performer, contributing nearly half of the company's EBITDA for the fourth quarter. ArcelorMittal achieved its 2011 mining targets of 10% and 20% growth in iron ore and coal production, respectively, and expects continued increases in 2012.

We believe ArcelorMittal's outlook is fairly upbeat. While there is clearly a regional divide, with 9 of 25 blast furnaces being idled in Europe during the past few months but no curtailments in North America, the company sees rising prices and shipments in the first quarter for both Europe and North America, with European economic sentiment improved from just a few months ago. Given that management believes steel consumption in Europe should fall in 2012, there is still a risk that the fourth quarter of 2011 will not be the bottom for the company's European segments. However, we think recent destocking should soften the effects of lower demand on the company's shipments, and we expect a better spread between steel prices and raw material costs should support profitability.

The company lowered its net debt to $22.5 billion six months ahead of its target date, bringing its net debt/EBITDA ratio down to 2.2 from 2.5 in September, comfortably below the 3.5 maximum required by its debt covenants. Taking into account the company's implied guidance for EBITDA of $4.1 billion-$6.0 billion for the first half of 2012, we believe fears about a necessary share issuance or debt restructuring should subside. Management plans to reduce its net debt further in 2012, and capital expenditure is limited to $4 billion-$4.5 billion, focused mainly on developing the mining assets.

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