ArcelorMittal , the world's largest steelmaker, forecast a sharp recovery in demand and prices in the second quarter after its core earnings in the first three months of the year 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 0842 GMT, they had recouped some of there losses and were down 1.85 percent at 30.42.

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.

The company was optimistic about its performance for the full year.

The economic recovery is continuing in line with our expectations and 2010 is set to be a stronger year for ArcelorMittal, Chief Executive Lakshmi Mittal said in a statement.

Sky-rocketing 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.

ArcelorMittal Chief Financial Officer Aditya Mittal told a conference call that the full impact would come in the third and fourth quarter.

Our intention is to pass on these cost increases to our customers. We are in discussions both with our automotive and other contract customers as to what is the appropriate mechanism to achieve this, he said.

RETURN TO PRE-CRISIS LEVELS

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.

Overall global steel demand should improve by 10 percent this year, thus returning to pre-crisis levels, CFO Mittal said, although added that developed world demand this year was likely to be 20 to 25 percent below 2008 levels.

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, 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 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 Sharon Lindores, Dale Hudson and Karen Foster)

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