Citing the downside risks of the current macroeconomic and steel industry environment, Standard & Poor's Thursday revised its outlook for the world's largest steel company, ArcelorMittal from stable to negative, but reaffirmed the Indian steel giant's ‘BBB+' credit rating.

For the fourth-quarter 2008 Arcelor reported a net loss of $2.6 billion or negative $1.93 per share due to $3.1 billion exceptional post tax charges. The company also cut production by 33% across all regions.

Meanwhile, Arcelor's first-quarter 2009 EBIRDA guidance is only $1 billion, due to full impact of price declines and production cuts.  However, for the year 2008, Arcelor reported net income of $9.4 billion ($6.80/sh), down 9% from 2007.

Nevertheless, S&P Credit Analysts Elena Anankina and Alex Herbert noted, The global industry environment remains challenging, and ArcelorMittal is not immune to industry pressures.

However, the analysts also noted that Arcelor has announced a comprehensive strategy to reduce debt by $10 billion at the end of this year, from the peak of $32.5 million reported as of September 30, 2008. The company also plans to cut capex from $5.5 billion last year to $3 billion this year.

The rating affirmation reflects our expectation that ArcelorMittal's free cash flow will remain positive, even amid the harsh 2009 conditions, the analysts said. We expect profits and cash flows to benefit from expected reductions in the price of iron ore and coking coal purchased under long-term contracts during the year.

Nonetheless, the S&P negative outlook for Arcelor reflects our view that the company would be downgraded should steel industry conditions deteriorate further or should the company be unsuccessful in implementing its strategy to further reduce debt and cut costs, so that its credit metrics fail to meet our rating guideline of funds from operations to debt of 35%.

The rating also assumes the company will not engage in large acquisitions and will cut its capital expenditures.