ArcelorMittal efforts welcomed
Steelmaker Arcelor Mittal SA’s share price surged as much as 22% in early trade yesterday as investors appeared to be buying into the troubled company’s efforts to return to profitability.
Steelmaker ArcelorMittal SA’s (Amsa’s) share price surged by up to 22% in early trade on Tuesday as investors appeared to be buying into the company’s efforts to return to profitability.
Since the beginning of August the share price has gained more than 60%. The uptick in the share comes after the group last week reported its first interim profit in six years in the six months to June, largely due to strong global demand, higher international steel prices, reduced costs and a weaker rand-dollar exchange rate during the latter part of the six months.
The company’s return to profitability and its improved outlook, despite dim prospects in the domestic market due to subdued economic growth, have caught the eye of investors who are banking on the compa- ny’s growth prospects, Stephen Meintjes, head of research at Momentum Securities, said.
“We are seeing early-bird investors who entertain hopes of a change in the company’s … prospects,” Meintjes said.
Amsa said last week it was taking steps to improve profitability and generate positive cash flows. These included costsaving interventions, assessing the profitability of various product lines and considering potential structural changes.
Cheslyn Francis, an analyst at Afrifocus Securities, said on Tuesday there was a major push within the company to improve its fortunes.
A combination of an improvement in net debt relative to equity and buoyant international markets in the second half of the current financial year would augur well for Amsa’s turnaround, Francis said.
“Amsa’s turnaround is coming along well and it is long overdue. Strong international steel demand and higher international prices are what will carry the company in the second half of the financial year.
“The local market is still subdued,” he said.
The group said last week it expected domestic steel demand and exports to remain stable in the second half of the financial year. The local steel sector has come under pressure from different fronts recently. These include weak local demand due to lack of infrastructure investment, and rising, cheaper imports that hurt local producers. In the six months to end-June imports, however, fell 31% to 177,000 tons.
“There will not be a pick-up in infrastructure investment in a low-growth environment. Local and regional investment has not been forthcoming,” Francis said.
According to Stats SA, seasonally adjusted manufacturing production decreased 0.1% in the second quarter compared with the first quarter, with seven of the 10 manufacturing divisions reporting negative growth rates over this period.
Amsa shares closed 3.41% stronger at R5.15 a share.
The latest manufacturing data shows that production in seven out of 10 sectors declined in June, with weak local demand, cost pressures and slowing global orders weighing on activity.
Accounting for more than 10% of formal employment in the country, manufacturing remains an important sector, and various government initiatives over the years have been designed to help stimulate production and job creation.
Yet despite the various efforts, manufacturing employment has been in decline over the past decade. In 2008, manufacturing accounted for more than 14% of formal sector jobs. Since then, nearly 300,000 jobs have been lost, with only 1.744-million people employed in the sector today.
While incentives and protectionist measures have a role to play, this won’t address the fundamental challenge facing local industry — a decline in global competitiveness.
A good example is the local steel industry, where SA’s share of global production has fallen from nearly 7% in 2007 to 3.7% in 2017. Local output has dropped by 31% over the same period, to 6.3-million tonnes in 2017, at a time when global production expanded 25%, according to data from Worldsteel.
ArcelorMittal SA (Amsa), the country’s largest steelmaker, last week reported its first interim profit in six years, mainly thanks to an improved global market and import tariffs leading to lower volumes of imported steel. The industry has also been named a so-called designated sector for government procurement, meaning local steel producers must enjoy preference when any government entity issues a tender for its products.
For Amsa, the strong international market and increased protection against imports have provided interim relief, but it will do little to ensure the sector’s longterm viability.
For any manufacturer to survive, it needs to be globally competitive. For Amsa, this means a reduction of $50 per tonne — or about 10% at current exchange rates — in its production costs.
The steelmaker starts on the back foot, with electricity, rail and port tariffs higher than those of its peers internationally. These costs are largely out of its control, and it therefore needs to find other places to trim fat.
Its other major input costs are raw materials – iron ore, coking coal and scrap metal, and labour. To a large extent, prices for raw materials are linked to global prices, leaving little room to manoeuvre. Amsa does enjoy a preferential supply agreement with Kumba Iron Ore, which gives it an advantage. But it also has limited scope around wages, as these are set on a sectoral basis through a bargaining council.
It is here where skills development and investment in technology separates the wheat from the chaff. Being able to do more with fewer inputs — being more productive — is part of what still makes Germany and South Korea steel-making powerhouses, despite higher labour costs and limited natural resources.
Imposing an import tariff to provide protection — or, as the DA is proposing in its latest measures to revive the manufacturing sector, allowing a price premium of up to 20% for locally manufactured goods procured by government entities — may provide some short-term relief.
However, these measures ignore the knock-on effect of higher costs on other parts of the domestic economy. It also avoids dealing with the real issue, SA’s lack of competitiveness, as illustrated by the country’s ranking of 53rd out of 63 countries in the latest Institute of Management Development’s World Competitiveness Yearbook.
Business’s job is to ensure it invests in the people, skills, products and processes that can compete internationally. The government’s focus should be on creating an economic environment where all manufacturers can start on an equal footing with their international counterparts. That means improving the quality and cost of our infrastructure, from power and ports to telecommunications and roads; improving the quality of our skills; and easing the regulatory burden on companies, and not spending time and money on incentives and protection measures that benefit only a chosen few.
SA’S SHARE OF GLOBAL STEEL PRODUCTION HAS DECLINED FROM NEARLY 7% IN 2007 TO 3.7% IN 2017