ArcelorMittal , the world's largest steelmaker, forecast a sharp recovery in demand and prices in all main markets in the second quarter after its core earnings in the first three months missed expectations.

The Luxembourg-based company, which has about 8 percent of the global market, said on Thursday its much-watched core profit (EBITDA) would rise nearly 60 percent in the second quarter from the first after a dip in the January-March period.

Nevertheless, ArcelorMittal shares fell by as much as 4.1 percent to an eight-week low of 29.70 euros. By 6 ET, they had recouped some of the loss and were down 0.9 percent at 30.73 euros in a slightly stronger overall market.

Analysts were surprised at the share reaction but said the fall could be due to a trading play rather than based on the company's results.

I'm surprised as well ... The guidance is higher than expected, although it wasn't way above, said Exane BNP Paribas analyst Vincent Lepine.

One Paris-based trader said the second-quarter guidance might appear reassuring but did not protect ArcelorMittal from a margin squeeze from the third quarter.

Skyrocketing raw materials prices and a move to short-term pricing for iron ore and coal are set to put pressure on steel mills in the second half, analysts have said.

On Wednesday, world No.2 Nippon Steel <5401.T> booked a weaker-than-expected quarterly profit and for the first time failed to give an annual forecast, with uncertainties over raw material costs and steel prices.

Chief Executive Lakshmi Mittal said that ArcelorMittal had had to accept the shift to quarterly from annual pricing, with iron ore prices up 80 percent in the second quarter from 2009.

Clearly we need to pass it on to our customers, he said.

2010 STILL SHORT OF PRE-CRISIS LEVELS

Mittal did express confidence about the full year.

Slowly but surely the economy is recovering. The pace of this recovery is not universally consistent ... but I believe we are heading in the right direction, Mittal told a conference call.

ArcelorMittal said it had seen improved demand in all its main markets. It said the automotive sector was growing faster than expected, but construction outside China was sluggish.

Mittal said that the global steel market should grow by at least 10 percent, but would still be 20-25 percent below pre-crisis levels of 2008 in the developed world and 5 percent below in emerging markets.

First-quarter shipments rose but were offset by lower average selling prices and increased costs, as the company had predicted. For the second quarter, ArcelorMittal said both shipments and prices would rise, although costs would also increase.

EBITDA (earnings before interest, tax, depreciation and amortization) in the first quarter was $1.9 billion, 11 percent down from the fourth quarter and compared with a market expectation of $2.1 billion.

ArcelorMittal said very cold weather in the former Soviet Union countries and operational difficulties in Kazakhstan explained the miss.

The $2.8 billion to $3.2 billion forecast for April-June was on balance more bullish than the average $2.9 billion figure analysts had penciled in.

The $500 billion steel industry took a heavy beating in the 2008/2009 downturn, with demand from key construction and auto consumers sharply down and destocking magnifying the negative effect. Producers cut output by as much as a half.

ArcelorMittal raised output to 72 percent of capacity from 70 percent in the fourth quarter of 2009 and said that would rise further to 80 percent in the second quarter.

Earlier in April, the World Steel Association said global steel demand was growing faster and sooner than expected, driven primarily by China, and was seen reaching pre-crisis levels this year.

European steel industry body Eurofer said on Monday the rebound was driven by restocking and that most steel-using sectors, except construction, would show year-on-year growth again in the second quarter.

(Additional reporting by Blaise Robinson, editing by Karen Foster and Rupert Winchester)

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