ArcelorMittal to Boost Steel Price

Manufacturers are bracing for higher costs after ArcelorMittal (MT-N31.11-0.91-2.84%), the world’s largest steel maker, announced plans to boost prices by about 10 per cent this year despite a slowdown in global production.

The impact points to potentially higher prices for consumers, since steel is used in everything from appliances to automobiles. However, given the fragile state of the economic recovery, some companies will be reluctant to pass on costs to their customers, instead absorbing the higher prices and accepting smaller margins.

ArcelorMittal, which controls about 10 per cent of world steel output, said the price hike is needed to offset higher costs for raw materials such as coal and iron ore. That’s despite a drop in the prices of those commodities over the past few months from post-recession highs that peaked in April.

For St. Thomas, Ont., machinery maker Arva Industries, which buys steel parts from suppliers, a 10-per-cent hike would hurt.

“It puts a burden on everyone,” president Fred Smith said. “People are just trying to get out of the recession and all of a sudden that comes out. It will be rough for a lot of people.”

Arva, which makes everything from rail cars to military and mining equipment, would likely pass on any higher prices for its steel parts to its customers, which includes corporations and governments.

Consumers aren’t expected to see rising steel prices reflected in purchases of cars or stoves in the near future, with many companies still working on luring back buyers after the recession.

“A lot of manufacturers are still hungry for business,” said Tom Runiewicz of economic consulting firm IHS Global Insight. “Profits are good enough right now that they’ll absorb any costs internally.”

Daimler AG, the largest truck maker and second-biggest maker of luxury vehicles, said it expects steel prices to remain “at the current high level” for the rest of the year, a spokesman in Germany said Wednesday. Most auto companies have contracts with steel companies that vary in length, which lessens the short-term impact of price increases.

ArcelorMittal said it has already passed on higher prices to some of its customers in Europe through recently signed contracts, and will aim to negotiate higher prices later this year.

The steel giant said the price increases are needed to maintain profitability, since it is still paying higher prices from commodities contracts settled during the run-up earlier this year.

“If ArcelorMittal has to get back to the second-quarter earnings, we need to increase our spot prices by 10 per cent and this is what we are working with our customers to explain,” chairman Lakshmi Mittal told analysts Wednesday, acknowledging it will be a tough sell.

“The challenge for the second half of the year will be to pass on the full extent of cost increases to our customers.”

Other steelmakers are expected to follow suit, and with little pushback as oversupply issues in the market are cleared up and the economy continues to recover, albeit more slowly compared to earlier this year.

"I think there's a good chance the steel industry will be able to increase prices," said Dahlman Rose & Co. analyst Anthony Rizzuto.

There are various types of steel and many different markets, based largely on geographic location. In China, where steel demand is among the strongest in the world, cold-rolled sheet was priced at about $842 (U.S.) per tonne in June, down from $931 in April, when commodities were at their peak since the recession. That compares to $716 per tonne in June last year, and a high of $1,100 in June 2008, before the global market meltdown.

Luxembourg-based Arcelor believes the recent commodities slump is bottoming out, and that a recovery is around the corner, which would also justify the rising steel prices. It forecasts the global steel market to grow by 10 per cent this year.

The price news came as ArcelorMittal reported a jump in sales and prices in the second quarter ended June 30, but warned the third quarter will be affected by slower growth in China and a summer slowdown in Europe and the United States.

Second-quarter profit was $1.7-billion (U.S.), up from a loss of $792-million a year earlier, while sales rose 43 per cent to $21.7-billion on higher prices and volumes.

“The improved performance in the second quarter is in line with our expectations and reflects the continued slow and progressive recovery,” Mr. Mittal said.

The company forecasts capacity utilization to decrease to approximately 70 per cent in the third quarter, compared to 78 per cent in the second quarter and 72 per cent in the first quarter of this year.

ArcelorMittal also said Wednesday that it plans to spin off its stainless steel unit into a separate company that would be free to pursue its own growth strategy and focus on specialty products. ArcelorMittal had tried to consolidate the business in the past few years without success.