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We have retained our Underperform recommendation on steel bellwether ArcelorMittal (MT - Analyst Report) following its disappointing first-quarter 2013 results. Our view reflects weak steel industry fundamentals and the tough pricing environment.

Why Retained?

ArcelorMittal turned to a loss in the first quarter, reported on May 10, hurt by a double-digit decline in the top line. It reported a net loss of $0.3 billion or 21 cents per share in the quarter compared with a net income of $92 million or 6 cents per share a year ago. Analysts polled by Zacks were expecting earnings of 7 cents a share on an average.

Revenues slipped 13% year over year in the quarter as ArcelorMittal had to contend with difficult economic environment, especially in Europe. Steel shipments fell roughly 6% year over year in the quarter.

ArcelorMittal remains affected by the challenging economic conditions in Europe. It is also exposed to volatility in steel pricing and tough competition and is still saddled with high debt. Considering the challenging economic conditions, ArcelorMittal has cut its annual dividend by roughly 73%.

Increased domestic imports, production ramp ups by peers and increased Chinese production have led to oversupply in the industry, which in turn, is causing a decline in steel prices. The effect of price declines was witnessed across all segments in the first quarter and led to a contraction in revenues.

Moreover, demand for steel remains weak. The world economy is struggling and the challenging conditions persist in Europe. Steel demand is currently roughly 30% below pre-crisis levels in Europe. ArcelorMittal has closed its operations in Liege, Belgium, and Florange, France, given slack demand and the weak European economy.

In addition, China’s economy remains somewhat sluggish and there is a demand-supply gap in the U.S. While construction activity is improving of late in the U.S., it is still not inspiring. Energy and other manufacturing sectors also remain sluggish. These may hinder ArcelorMittal’s earnings power moving ahead.

ArcelorMittal currently retains a Zacks Rank #4 (Sell).

Other Stocks to Consider

Other steel producers having a favorable Zacks Rank are Shiloh Industries Inc. , Kobe Steel Ltd. (KBSTY) and Angang Steel Company Limited (ANGGY). While both Shiloh Industries and Kobe Steel hold a Zacks Rank #1 (Strong Buy), Angang Steel retains a Zacks Rank #2 (Buy).

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