By Alex MacDonald 

LONDON--Steel giant ArcelorMittal on Friday reported a rise in second-quarter net profit on a one-time gain and said it was optimistic about the second half of the year, but cautioned that excess steel capacity globally remains a concern.

The Luxembourg-based steelmaker--the world's largest by production, accounting for some 6% of global steel output--said net profit surged to $1.11 billion in the three months ended June 30 compared with $179 million a year earlier.

The figure beat expectations of a $201 million profit based on a Wall Street Journal poll of seven analysts, largely because of an $832 million one-time gain largely related to reduced health care costs under its new labor contract in the U.S. The contract is part the company's efforts to improve the performance of its U.S. operations.

ArcelorMittal shares rose more than 4% in early trading in Europe. Jefferies analyst Seth Rosenfeld said the results beat his expectations across all divisions, with the most notable surprise in Europe and North America.

Earnings before interest, taxes depreciation and amortization rose 27% on year to $1.77 billion in the second quarter, as costs fell more than average selling prices for steel, helping expand the company's profit margin despite a 13% drop in revenue to $14.74 billion because of lower steel and iron ore prices. Ebitda in its U.S. division more than doubled in the period.

"Although the industry continues to face the challenges of structural overcapacity, we are seeing better market conditions compared with the second half of 2015 which lead us to be cautiously optimistic about the remainder of the year," Chief Executive Lakshmi Mittal said. The company said it expects minimal impact on its business from Britain's decision to exit the European Union.

The global steel industry has been roiled by Chinese steelmakers shipping their product abroad at a record pace because of anemic demand at home. Monthly exports reaching their second highest level on record in June after hitting a record high in September.

The U.S. and EU have been particularly hard hit by the influx of cheap Chinese steel, prompting them to respond by launching trade cases against China to protect their producers. Chief Financial Officer Aditya Mittal said this is starting to have a positive effect in reducing steel imports into the U.S. but not the EU, where more tariffs are in the process of being applied.

In light of the challenging market conditions, ArcelorMittal earlier this year raised EUR2.8 billion ($3.1 billion) in a rights issue to strengthen its balance sheet. Shares subsequently rallied and are up nearly 90% so far this year, buoyed by a pickup in steel prices in its key U.S. and European markets in the second quarter compared with the first three months of the year.

Steel prices in the U.S. and Europe, however, have begun to ebb raising concerns among analysts about ArcelorMittal's profitability in the second half of the year.

The company noted that its typically takes a quarter for prices to effect its business, which should provide some support in the second half when steel demand is seasonally weaker.

ArcelorMittal said it reduced net debt to $12.7 billion by the end of June from $17.3 billion at the end of the first quarter, largely because of the rights issue and asset sales.

Last month the company teamed up with Italian steelmaker Marcegaglia to bid for the troubled Ilva steel plant, Europe's largest single steel producer, which is currently held under special administration by the Italian government. The company said the offer, if successful, would be structured in such a way to avoid compromising its balance sheet.

Write to Alex MacDonald at alex.macdonald@wsj.com

 

(END) Dow Jones Newswires

July 29, 2016 04:11 ET (08:11 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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