European steelmakers were seen expanding squeezed margins at the start of 2011 as prices caught up with a spike in iron ore and coal costs and demand improved, particularly from the auto and engineering sectors.

ArcelorMittal (ISPA.AS), the world's largest steelmaker, kicks off sector earnings for the region, having already said core profit (EBITDA) for the January-March period would rebound from a very weak level at the end of 2010.

Investors will also be looking to Germany's ThyssenKrupp (TKAG.DE), hoping for more details on its restructuring when it reports results for its second quarter at the end of next week.

The steelmaker on Thursday unveiled a plan for up to 10 billion euros ($14.5 billion) in divestments and the possible spin-off of its stainless steel business, Europe's biggest, lifting its shares as much as 8 percent.

Aperam (APAM.AS), the stainless steel business spun off by Arcelor earlier this year, is expected to report a first-quarter core profit more than five times higher than the previous quarter, according to a Reuter’s survey.

ArcelorMittal, which makes 6 to 7 percent of the world's steel and whose production is more than double its nearest rival, typically gives a profit outlook for the quarter ahead, the most keenly watched number for investors.

A Reuter’s poll showed analysts expect the second quarter to show a 35 percent improvement from the first, when the company is expected to report a 29 percent rise from the final three months of 2010.

Based on the poll, April-June core earnings would be the highest since the third quarter of 2008.

From mid-July to mid-November 2010, Metal Bulletin's MBIO index of Chinese iron ore prices rose by some 37 percent, while steel prices in Europe dropped 7 percent.

From then until the end of March, steel prices have shot up 32 percent, while iron ore only made up 10 percent, according to Metal Bulletin.

Steel contracts for a given quarter are typically set during the previous three-month period, meaning that the pick-up of steel prices should influence first-quarter sector earnings, but only have a full impact from the second quarter.

The market is divided on what will happen in the second half of the year.

The less bullish point to a large price differential between Asia and other markets and a further rise in ore and coal costs.

"I think there will be a positive margin impact in Q2, but due to higher input costs and the fact that steel prices have not improved since the end of March, I do not expect much further improvement after that. Q2 could be the start of a plateau," said Ingo-Martin Schachel, analyst at Commerzbank.

The bulls say inventory levels are healthy, demand is improving and Chinese prices should rise rather than Western prices fall.

Analysts at Nomura said fears of a repeat of severe margin compression seen in the second-half of last year were unlikely to be borne out, as underlying demand continues to recover.

Steel trader Kloeckner & Co (KCOGn.DE) also reports results on Wednesday, followed by German steelmaker Salzgitter (SZGG.DE) on Thursday and peer ThyssenKrupp on Friday.

The latter, along with Austria's Voestalpine (VOES.VI), have benefitted from their exposure to the booming German car and engineering sectors. Voestalpine raised its full-year outlook in February after a forecast-beating quarter, and said only the construction sector was still lagging.

Figures out already from U.S. steelmakers, however, attest to the turnaround from a rotten end to 2010.

Nucor (NUE.N) increased first-quarter profit by a factor of five, driven by higher prices and shipments.

U.S. Steel (X.N) posted a third consecutive quarterly loss last month, but said higher prices and shipments would lead to significant profit in the second quarter.

However, Asian producers are still suffering from depressed margins, with record output from China and stubbornly high prices of iron ore and coking coal. China's tightening and Japan's earthquake have quelled demand there.

World No.3 POSCO (005490.KS) missed expectations with a 36 percent fall in quarterly profit last quarter.

China's Baoshan Iron & Steel (600019.SS), the world's second largest steelmaker, suffered a 22 percent fall in first-quarter profit due to surging raw material costs and overcapacity.