ArcelorMittal between rock and a hard place

ArcelorMittal SA’s review of sites, which may lead to closure of some operations, is suggestive of the magnitude of the struggling steelmaker’s problems.

The steel maker, whose financial performance has gone backwards since it posted its first full-year profit in 10 years in 2018, is taking blows from all sides. Its operational environment has deteriorated and there are no signs of immediate recovery, hence the desperate measures announced this week.

Factors that have forced ArcelorMittal SA into a corner include the falling domestic steel consumption, rising raw material costs and runaway administrative costs such as electricity, rail and port. It is as if the operational environment has conspired against the steelmaker.

In the first half of the 2019 financial year, international iron ore prices went up by 28% while steel prices fell by 13%.

With very little that it can do about macroeconomic factors, it has done the obvious — resorted to cash preservation and taking a hard look at its cost base.

SA’s crude steel production slumped 3.6% in the first seven months of 2019, according to the World Steel Association, the Brussels-based steel industry association. With no real prospect of an increase in infrastructure spend this production trend may continue for longer.

Adding to ArcelorMittal SA’s misery is the introduction of the carbon tax. This will make it even harder for the firm to compete against imports.

Trencor shares enjoy a boost

The increase in the Trencor share price appears to be gaining momentum as the proposed unbundling of its controlling stake in marine cargo container group Textainer edges closer. On Monday Trencor added over 6% to R30.80, which is just R2 off its 12-month high.

Analysts could see no immediate reason for the spike given that confirmation of the unbundling of Textainer was two weeks old and the plan to distribute the 27.2-million shares has been on the cards for years. But then trading patterns don’t always appear logical.

Trencor shareholders have been patient with the valuedestroying structure over its 48% stake in Textainer.

It appears that control structure has done little more than enable the Textainer management to get away with a dismal long-term performance.

Until around 2012 Textainer was the largest operator of marine cargo containers in the world. Since then it has slid behind Triton, not just in size but also in profitability.

Results for the six months ended June show a continuation of this grim trend. Textainer’s 3% return on equity compares with Triton’s 16.7%; Textainer earned net income of just $17m compared with Triton’s $176m. Even allowing for some one-offs, this looks unacceptable for Textainer, which is now only just covering its interest charge.

If everything goes according to plan the Textainer shares will be distributed to Trencor shareholders before year-end. Before that the JSE will have to approve a secondary listing of Textainer “on a basis acceptable to the Textainer board of directors”, says Trencor.

An “acceptable basis” might require the JSE to tolerate Textainer’s anti-takeover bylaws. This would mean that although the Trencor value-trap will be removed, the protection provided to Textainer’s executives will remain in place.