ArcelorMittal's profits melt as commodities prices fall

The world's biggest steel maker, ArcelorMittal, shocked the market yesterday when it doubled production cuts and said earnings will drop. The increasingly bleak outlook for manufacturing across the globe as the world's economy veers into recession has taken its toll on demand from Mittal's clients including builders and car makers.

The Luxembourg-based company's earnings were also short of analyst estimates, and Arcelor warned that profit may almost halve to $2.5bn (£1.5bn) in the fourth quarter.

Its shares lost more than a tenth of their value yesterday. They had already lost more than half of their value this year, slashing the company's market value to not far above €30bn (£24bn), and underperforming many of its industry peers.

ArcelorMittal, founded and run by the UK's richest man, Lakshmi Mittal, joins British, Russian, South Korean and Japanese competitors in curtailing production due to a dramatic slump only two months after prices rose to a record. And the outlook for steel prices next year is one of further price cuts, not recovery.

ArcelorMittal said it will maintain its dividend at $1.50 a share in 2009 and cut net debt by $10bn by the end of next year. Steel shipments fell 1.5 per cent to 25.6 million metric tons in the third quarter. The company, which employs 326,000 and operates in Europe, Asia, Africa and America, was the world's top steel producer in 2007, according to the World Steel Association, and produced three times more than its nearest rival, Japan's Nippon Steel.

The price of the metal, used extensively in manufacturing worldwide, has started to fall recently, with most observers expecting a sharp further drop in 2009. Hot-rolled coil, a benchmark steel product used in cars and construction, averaged €797.31 a ton in the third quarter in Europe, about two thirds higher than a year earlier, but it is expected by analysts to fall back in value by about a third next year.

"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," Mittal said in a statement.

Severstal, Russia's largest steel maker, and its domestic rivals Evraz and Mechel, also said last week that they are curbing spending.

The Arcelor outlook also makes bleak reading for workers in the UK steel sector. Corus, the UK unit of India's Tata Steel, formed to a large extent from former assets of British Steel, said last week that it may prolong a 20 per cent cutback through the second quarter of 2009.

The business, headquartered in Millbank, London, employed 24,000 in the UK at the end of 2006, more than half of its total headcount. The high amount of debt used by Tata for the acquisition of Corus may also put it under additional pressure as profit falls and the UK business's debt burden increases over time, according to analysts.

The automotive industry, a key steel user, is entering a drastic slowdown. US car sales tumbled by about a quarter in September, the steepest monthly decline since 1991, while European sales slid 8.2 per cent. Car makers, who are among the biggest users of steel, have been feeling the pain from the credit crunch for almost a year. And there was more doom and gloom this week from the European automotive industry as BMW admitted a sharp fall in profits and Jaguar announced plans to extend its voluntary redundancy scheme to up to 600 staff.

Other areas of traditional industry are faring little better. Manufacturing output in the UK fell for the seventh month and by far more than expected in September, to mark the longest stretch of monthly declines in 28 years.

US car makers are faring no better and General Motors and Chrysler are trying to secure a government handout as they explore a merger designed to help keep them in business.

Large emerging markets like China and Russia are also key to global steel demand, and demand from such markets for materials for construction and manufacturing had powered the recent unparalleled increase in the price of commodities, including steel. But while they were initially viewed as resilient to the credit crunch, they have in recent weeks started to buckle under the pressure of the worsening global financial meltdown. China's growth is expected to fall to within a single digit figure this year, a much slower pace than recent years.

Formed in 2006 through Mittal Steel's dramatic and long-fought $38.3bn purchase of European rival Arcelor, ArcelorMittal has sought to increase control over raw materials such as iron ore and coking coal. The company has invested in mines in Russia and Africa, and said in May that it was considering acquisitions or possible joint ventures in Indonesia, Thailand and Malaysia.

Born in Sadulpur in Rajasthan, India in 1950, Lakshmi Mittal – who now resides at a mansion in Kensington Palace Gardens – started his steel company, then called LNM, in 1976. The company grew and bought rival Ispat in 2004, forming Mittal Steel, which became the world's biggest steel producer.

Mittal again undertook a huge deal with its takeover of its closest rival, the number two world steel producer Arcelor, in 2006. Mittal was successful in achieving that takeover after raising its offer at the culmination of a long public courtship of the initially reluctant Arcelor.

Lakshmi Mittal's family still holds 44 per cent of the combined company and his son, Aditya Mittal, is the finance director.