ArcelorMittal , the world's largest steelmaker, forecast a faster than expected recovery in demand and prices at the start of 2011 after a margin squeeze in the fourth quarter.

The Luxembourg-based company, which makes 6-7 percent of the world's steel, said on Tuesday core profit would improve in the first quarter by more than the market consensus, following an unexpected net loss in the final three months of 2010.

Chief Financial Officer Aditya Mittal said ArcelorMittal was seeing a strong recovery in the United States, moderate growth in China and restocking in Europe even though end-user demand was barely increasing there.

Mittal said the company expected 2011 to be a better year than 2010 and would raise capital expenditure by more than 50 percent this year.

He said the second quarter should be stronger than the first, when ArcelorMittal's furnaces would run at 76 percent of capacity, compared with 69 percent at the end of 2010.

There is some risk that in the second half of 2011 the strength that we are seeing in the first half will not repeat, but I still expect overall the year to be better, he said.

ArcelorMittal, whose production is more than double that of its nearest rival, said it expected core profit (EBITDA) to rise to between $2 billion and $2.5 billion in the first quarter after a slump to $1.85 billion in the final quarter of 2010.

The market had been expecting a first-quarter figure of $2.15 billion, according to a Reuters poll.

Analysts said the outlook and fourth-quarter core profit were higher than expected and that the net loss at the end of last year was largely the result of one-offs.

ArcelorMittal shares were the strongest performers in the

FTSEurofirst 300 index <.FTEU3> of leading European shares, hitting a nine-month high of 28.55 euros, a gain of 4.8 percent

MARGIN SQUEEZE ENDED

The $500 billion steel sector has been caught in a margin squeeze since the middle of 2010, when raw material costs began to steadily increase but steel prices dropped as activity slowed for the industry as a whole.

Since mid-November, ore costs have risen by about 22 percent, but hot rolled coil steel prices in the United States are 49 percent higher, according to Platts.

However, the full impact of this reversal is only likely to be felt from the second quarter, given it typically takes four months for price changes to feed into ArcelorMittal's results.

ArcelorMittal's northern European rivals such as ThyssenKrupp and Voestalpine are running at near-capacity.

They have had more success raising prices for their higher grade steels to customers, benefiting from higher exposure to German carmakers and engineering firms -- currently more buoyant sectors than construction, steel's other main market.

However, should a broader steel recovery take hold, ArcelorMittal has the potential to make gains, analysts say.

Tuesday's figures were complicated by last month's spin-off of ArcelorMittal's stainless steel business, Aperam , which also reported its results for the first time.

It also forecast volume and pricing improvements in the first quarter after a final quarter of 2010 just in profit.

(Additional reporting by Robert-Jan Bartunek; Editing by Jon Loades-Carter)

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