British-based steel magnate Lakshmi Mittal yesterday said there had been a "very positive reception" to his hostile bid for main rival Arcelor.

Mr Mittal, the UK's richest man and owner of Mittal Steel, the world's largest steelmaker, added that he was "confident" his £12.76 billion offer was making progress.

The message came as Mittal Steel reported increasing sales but falling profits for 2005 amid the rising cost of gas.

Sales rose from $22.2 billion (£12.8 billion) in 2004 to $28.13 billion (£16.22 billion) last year following a 17 per cent increase in shipments to just under 50 million tonnes.

But net income fell from $4.7 billion (£2.71 billion) to $3.37 billion (£1.94 billion) as steel prices softened and the cost of raw materials and natural gas lifted.

Mr Mittal said it was a "solid performance in a more challenging year" and heralded the company's expansion brought about by the purchase of ISG in the United States.

The 55-year-old Indian-born billionaire added: "The strength of our performance in current market conditions illustrates the increased stability that industry consolidation has delivered.

"This same logic lies at the heart of our proposed strategic merger with Arcelor. The steel industry needs strong, value creating, growing companies with global reach which this combination would deliver.

"We are pleased with the very positive reception our offer has received and are confident that progress is being made towards establishing the regulatory frame-work for it."

Mr Mittal launched his hostile bid for Luxembourg-based Arcelor last month in an audacious move to merge the two largest steel companies in the world and tighten his grip at the top of the industry.

The proposed deal would create a company with a market value of £22.4 billion, revenues of almost £40 billion, and a workforce of 320,000 people.

But Arcelor rejected the approach and said its future was "much better without Mittal Steel", which is based in Rotterdam.

Mr Mittal has launched a charm offensive to woo European leaders concerned about the proposed deal because of job security and future investment.

The self-made tycoon said the tie-up would create the world's first steel giant capable of producing 100 million tonnes of steel a year. Mittal Steel would not improve its offer for Arcelor, he insisted.

There was little geographic overlap between the two companies which made them "the right fit".

Mr Mittal added that he was working to convince politicians across Europe to approve the deal, which is likely to be investigated by competition watchdogs.

However, he admitted that talks with Arcelor had so far been unsuccessful.

Mr Mittal said: "In the beginning there was a bit of surprise among countries in Europe but I am very pleased with the meetings I've had with politicians who are understanding that this deal makes a lot of sense.

"We are moving in the right direction and when we meet with shareholders we get a very positive response. We have started meeting the unions and we have told them there will be no job cuts as a result of this merger.

"We are seeing a lot of positive signals which lead us to believe we will succeed in this transaction."

Mr Mittal added he was looking forward to entering talks with Arcelor.

"We are confident because this kind of organisation has to have some kind of friendly conversation at some point," he said.

He said the outlook for Mittal Steel in 2006 was good and forecast a ten per cent rise in shipments in the first quarter.

But he added: "Overall average selling prices are expected to remain flat and cost of sales are expected to increase primarily due to the increase in natural gas cost."

Despite the rising costs, Mr Mittal forecast operating income to be higher in the first quarter than in the last three months of 2005, when it came in at £502.2 million - up from the previous quarter but down on a year earlier.

Mr Mittal cited the inclusion of a full-quarter contribution from Kryviy Rih for the expected improvement this year. Mittal Steel bought the Ukrainian steel mill, formerly called Kryvorizstal, for £2.77 billion last year.