London, England (FT.com) -- Lakshmi Mittal sounded a warning note over the pace of the world recovery after ArcelorMittal announced a 146 per cent rise in underlying profits in the second quarter, compared with the same period last year.

The chairman and main owner of the world's biggest steelmaker said profits were likely to show a quarter-on-quarter fall in the three months to the end of September, reflecting weaknesses in the steel market linked to an economic slowdown in China.

In a statement, he said the company faced a "challenge" in passing on the full impact of recent big rises in costs of raw materials to customers, in another factor that could diminish the pace of the expected upturn.

Mr Mittal said the slowdown in China would be "temporary". He added: "We are seeing some likely deceleration in the pace of demand growth in the third quarter, rather than any fall reduction in demand."

He still expected Chinese steel consumption and production to rise about 10 per cent this year compared to 2009.

On the topic of the overall trajectory of the world economy, Mr Mittal said demand pressures in many sectors were still weak and, as a result, governments should resist pressure to introduce austerity measures to curb fiscal deficits "too soon".

"In my view there's still a need for governments to pump in a certain amount of money into their economies to stabilise demand," he said. But Mr Mittal has ruled out the possibility of a "double-dip" recession affecting the world later in the year, an outcome that some economists are worried about. "We might see some blips [in the overall trajectory of the world economy] but no more than this" he said.

ArcelorMittal also said it was considering spinning off its small stainless steel unit to shareholders after failing to make headway in talks to sell the business to other steel makers or interest them in a joint venture.

Mr Mittal said he and the rest of his family would have the same shareholding -- about 42 per cent -- in this new stainless steel entity as they have in ArcelorMittal. He would also be the chairman of the new company, assuming plans went ahead.

Last year ArcelorMittal was responsible for 8 per cent of world steel output, almost twice the share of its biggest rival.

The company has been among the large industrial groups worst hit by the recession as a result of a big contraction in the steel industry in the past two years linked to much lower demand by big customers such as the car, white goods and construction sectors.

But in line with expectations of a steady recovery in the industry this year, ArcelorMittal's earnings before interest, tax, depreciation and amortisation were $3bn in the second quarter, in line with previous guidance, and well above the $1.2bn recorded in the comparable period of 2009.

Sales in the second quarter were $21.6bn, up 42 per cent on the $15.2bn in the equivalent three months last year. The company's net income came in at $1.7bn in the most recent quarter after a $792m net loss last time. The increased profitability has shown through as selling prices have risen, in line with increases in demand.

For the whole of the first half, ebitda was $4.9bn, up 132 per cent on the $2.1bn recorded last year, while sales rose 33 per cent to $40.3bn.

But in a jarring note to investors, Mr Mittal said he expected the company's ebitda in the third quarter to fall to between $2.1bn and $2.5bn as a result of "a combination of seasonal factors and the effects of the economic slowdown in China".

In both 2008 and 2009 the company's ebitda rose between the second and third quarters.

However, in an effort to show that the expected upturn was still broadly on track, Mr Mittal said underlying demand "continues to show improvement" and that the upturn would be "slow and progressive".

In 2009, China accounted for just over two-fifths of world steel production of 1.2bn tonnes.

The fact that China's steel output rose so much put a floor under global production which fell during the year by 8 per cent. This year Mr Mittal -- and many other steel industry observers -- expect demand for the metal to rise about 10 per cent.

ArcelorMittal's stainless steel unit employs about 11,000 out of its worldwide workforce of some 280,000, with its operations mainly in Belgium and Brazil. Last year it accounted for 5 per cent of the company's ebitda of $5.8bn.

This year analysts believe ebitda for the whole of the company will rise to $11bn-$12bn.

Over the past 18 months, Mr Mittal has concluded that it no longer makes sense to treat stainless steel as a core part of the company and has tried to find buyers for it or form a joint venture with other steel companies such as Posco of South Korea or Outokumpu of Finland.

Stainless steel is used in areas in which special surface finish is required -- such as in kitchen sinks or medical devices -- but is suffering from over capacity.

The Financial Times Limited 2010




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