ArcelorMittal gains ground but is still fighting against the odds
Ever since Kumba Iron Ore significantly increased its prices to ArcelorMittal SA (Amsa), from cost plus 3% a few years ago, it has been a struggle for the steel producer to make profits.
It has fallen off the radar of most research analysts. However, after years of posting truly “drek” results, CEO Kobus Verster could take a little satisfaction in announcing a reasonable turnaround in fortunes, in fact into profit, for the interim period to June 2018.
Revenue was up strongly thanks to substantial increases in production volumes, sales and exports, supported by strong prices. Combined with cost containment, there was a much welcome profit in both ebitda (earnings before interest, tax, depreciation and amortisation) level and margin. Verster is “quite chuffed” with this result.
Although the medium-term global steel market has positive fundamentals, supply discipline and a strong dollar price, the strengthening rand can get in the way — as it did in these latest results. The international steel price in dollar terms increased by up to 20%, but rand strength meant Amsa could only enjoy an 8% price increase.
One key focus for Amsa in a hopeful recovery is to regain its position on the global cost curve. Having done extensive benchmarking on this, the company’s target is to reduce cost of production by $50/t over the next couple of years.
However, there are a few obstacles — thanks to the government’s rail transport and energy tariffs — that make our steel industry globally uncompetitive. The price of electricity from Eskom puts it at a structural disadvantage to its global peers. Amsa tries to tackle the problem by getting site-by-site tariff dispensations, reducing consumption and using alternative sources, but authorities do need to take a hard look at how they are harming the competitiveness of SA’s businesses.
The recent US tariffs do not hugely affect Amsa, which exports a limited 70,000 tons to the US. This product will have to find another home and at a different price. However, there are potentially more serious risks coming from the developing trade wars. Verster cautions that when the US does in fact firmly close the door on imports, there will be steel producers in other countries also looking for new destinations and this could eat into Amsa markets in East and Southern Africa.
Additionally, the unquestionable worry is if trade wars start affecting global growth.
Exports have always been a problem for local producers as they do not have the economies of scale to compete with many other countries on price. Also, SA is geographically challenged and sending out heavy steel across the deep oceans is an expensive exercise, especially when the starting point for that commodity is expensive compared with steel manufactured in other regions.
It does not have the economies of scale to be a world-class steel producer. The Mittal parent instituted a series of efficiency programmes when it became a shareholder. But despite cost cutting and streamlining, Amsa still cannot compete efficiently on the world stage. Domestic demand for steel is poor due to a lack of infrastructure spend, and local steel consumption is at a nineyear slump. Manufacturing, mining, building and construction are in the doldrums.
The motor sector is unattractive. Although the bulk of volume of a vehicle is steel, the finished value is only about 5%.
Amsa has done what it can in these financial results and all praise to it. But with local demand for fabrication steel unlikely to improve, a sustainable turnaround will be difficult to achieve.