Signs of optimism at ArcelorMittal

Contrary to the gloomy outlook in the past few years, steel maker ArcelorMittal SA is bracing for growth. The company has had its back against the wall as it grapples with a myriad problems, particularly cheap imports, weak domestic steel demand and global oversupply of steel.

Contrary to the dominant gloomy outlook in the past few years, steelmaker ArcelorMittal SA expects much-needed growth.

The company has had its back against the wall for a while now, as it grapples with myriad problems, particularly cheap imports, weak domestic steel demand and the global oversupply of steel.

In the past five years, ArcelorMittal’s shares on the JSE have plummeted 89.24%, compared to the JSE’s industrial metals index, which is down 36.16%. In the same period, the all share index is up 22.59%.

The government’s imposition of import protection measures has given ArcelorMittal a breather, as the influx of imports in the past few years throttled steel prices and worsened the negative effect of a lacklustre local economy.

When it released its results for the six months ended June 30, ArcelorMittal said imports had declined by 31% compared to the same period in 2017.

The decline has coincided with a much improved outlook in the global steel market. In the first half of 2018, ArcelorMittal increased exports by 26% compared to 2017.

World Steel Association director-general Edwin Basson says the global steel outlook for the next 18 months suggests 1.8% growth in 2018, followed by 0.7% in 2019.

“Steel demand is benefiting from the broad and favourable global economic momentum affecting both the developed and developing world at the same time,” Basson said.

However, the steel tariffs and a buoyant international market do not solve all of ArcelorMittal’s problems. The domestic steel market remains constrained because of minimal local investment and infrastructure spending. CEO Kobus Verster says there is subdued demand for steel from mining, construction and manufacturing.

ArcelorMittal’s return to sustainable profitability is tied to the health of SA’s economy. “Most steel companies require a reasonably strong local demand to be profitable. We are at the bottom of the cycle and steel demand is severely impacted, with the current steel consumption in SA almost at a 10-year low,” said Verster.

As at December 2017, ArcelorMittal’s annual production capacity was 6.1-million tons of liquid steel produced from its facilities in Vanderbijlpark, Saldanha, Newcastle, Vereeniging and Pretoria.

ArcelorMittal’s path to sustainable financial performance will also depend on the steps the company takes to rein in costs. In the year ended December 2017, revenue increased by 19% but the cash cost per ton of liquid steel of its raw materials basket

which accounted for 50% of costs soared by 32%.

Verster says the company has prioritised cost containment. “I believe that we are not competitive in terms of some of our controllable costs. We still have to work on our own cost base to become a sustainable business. I think it is naive to think that you can come out of a period of seven or eight years of losses and suddenly start making profits,” he said.

ArcelorMittal has a “structured” programme to reduce costs by $50 a ton in two to three years to improve the company’s sustainability. “Over a longer term, that should bring us closer to being a sustainable business,” said Verster.

In addition to the reduction of costs, ArcelorMittal wants to increase output from its existing assets, hence the decision to restart the closed Vaal Meltshop plant in Vereeniging.

Stephen Meintjes of Momentum Securities says while there have been positive developments at ArcelorMittal, including the interim profit in August, investors are likely to bide their time and wait for further signs of recovery. “The stock has been ignored for a while,” he said.

ArcelorMittal shares were down 4.82% at R3.75 on Friday.

MOST STEEL COMPANIES REQUIRE A REASONABLY STRONG LOCAL DEMAND TO BE PROFITABLE