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If the health of a nation's steel industry is a test of economic wellbeing, investors have more than minute gains in European output numbers to feel optimistic about. Most steelmakers, from Tata Steel Ltd. to ArcelorMittal, posted better results in their most recent quarter. However, this was more to do with cost-cutting and seasonal trends than a sign that the world's steel industry is back to fighting strength.

The global steel market is still plagued by overcapacity. Nomura estimates that there is an excess 400 million tonnes of the metal sloshing round the system. Europe is trying to cut capacity – it fell 5 per cent in the first half. But this has not been met by cuts in China, which produces half of the world's 1.4bn tonnes of annual steel output. In spite of noise from Beijing about curtailing overcapacity in heavy industries, steel production in the country picked up by 7 per cent.

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Still, ArcelorMittal's earnings before interest, tax, depreciation and amortisation picked up by almost a fifth in its recent quarter from a year earlier. But then the world's largest steelmaker by production capacity has worked hard to cut costs by shutting underutilised plants. Others, such as Voestalpine, saw margins expand on the back of volume growth. This should feed through to the rest of the sector this half as steel consumers restock after running stocks down in the expectation that a fall in iron ore prices would bring down the price of steel. Restocking, and the fact that iron ore prices have held up reasonably well this year, has also supported steel prices which have picked up by 5 per cent since the beginning of July.

Steelmakers could do with volume and price improvements to support earnings and ease stretched balance sheets. Net debt at ThyssenKrupp is almost 3 times its expected earnings, at Tata Steel it is more than 4 times. But while overcapacity exists, the gain in the steel price is unlikely to last long. That means the accompanying recovery in steelmakers' share prices may also be shortlived.

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