ArcelorMittal, the world's largest steelmaker, said it would try to increase its prices for steel 10% this year to preserve profits, even as it expects steel demand to weaken throughout most of the world.

"We need a 10% price increase for spot business in order to replicate our profit level in the second quarter," Chief Executive Lakshmi Mittal said in an interview.

Mr. Mittal said the steelmaker has renegotiated some of its automotive contracts and that "in some cases for the new contracts, we have succeeded on passing our higher raw-materials costs over." ArcelorMittal said its iron-ore costs have been rising all year. Iron-ore prices rose about 9% in the second quarter from the first quarter.

In general, steel prices rose as the global economy recovered and demand tightened world-wide. But producers ramped up production too fast, causing steel prices to slip, especially in the past month. Depending on the market and product type, steel prices have fallen 8% to 10% in the past several weeks. Some steel analysts expect steel prices to keep falling in the third quarter and perhaps into the fourth quarter.

Seeking a price increase when demand is beginning to soften is risky. Rivals could come in and offer lower prices.

ArcelorMittal believes the industry will take out production to match supply and demand and keep prices strong.

Arcelor has idled three blast furnaces in Europe but is expected to restart one of its idled blast furnaces in the U.S. because demand warrants it, he said.

Mr. Mittal acknowledged that it is a difficult environment to increase prices. "That will be our challenge," he said, adding that a team of executives will approach customers and explain the company's cost position.

The price of steel varies. In one of Arcelor's biggest businesses-flat carbon steel in Europe, which includes automotive applications-steel prices averaged $776 a metric ton in the second quarter, up 2.5% from the first quarter.

Mr. Mittal said the company is seeing signs of weakness in the steel market, as China's consumption declines and European customers reduce purchases, partly because of a seasonal slowdown and overall lethargy in that economy.

Capacity utilization, or the overall production rate of each plant, is likely to fall for the third quarter to about 70%, the company said. In the current quarter, the company's plants were running as high as 78% capacity utilization. In the first quarter, the rate was 72%.

Generally, steel plants need to run at about 60% to break even. A 70% production rate doesn't leave a lot of room for profit and Mr. Lakshmi said the company will attempt to offset the effects of the lower run rates with higher steel prices.

Mr. Mittal said he doesn't expect the slowdown in China to be long-term. He said he still predicts that global steel consumption is on track to rise 10% in coming years. The world consumes about one billion metric tons of steel annually.

ArcelorMittal's U.S. operations are stronger compared with its European operations, said Aditya Mittal, its chief financial officer. He said the capacity utilization in the U.S. will actually increase amid plans to restart a blast furnace in Indiana on Sunday. "The summer slowdown is more pronounced in Europe than the U.S.," he added.

The company has idled three blast furnaces in Europe and three of its nine U.S. blast furnaces.

European steelmakers have been sounding alarms about steel demand and prices falling, saying last week that the second quarter will be an earnings highpoint for the year.

In the U.S., steelmakers are reporting rising inventories and saying that they will cut production if demand doesn't return soon. U.S. Steel Corp., the country's largest steelmaker by production, posted a $25 mln second-quarter loss, its sixth straight quarterly loss.

South Korea's Posco, the world's third-largest steelmaker, and Japan's Nippon Steel Corp., the fourth-largest, both warned that their profit would decline over the rest of the year amid lower steel prices and less demand from China.

Higher volume and prices in the second quarter helped ArcelorMittal sales rise 43% from a year earlier to $21.7 billion, up 43% from a year earlier and 16% from the first quarter. Steel shipments rose 6% to 22.8 mln metric tons from 21.5 mln metric tons in the first quarter.

The company also said it is assessing a spinoff of its stainless-steel business to tackle an overcapacity problem in Europe.

Source: WSJ