A scary case of melt­down and me­tal fa­tigue

It’s been a steep down­ward plunge for the steel pro­ducer, and no change in sight

Financial Mail - Investors Monthly - - Opening Bell - AN­DRIES MAHLANGU

com­pet­i­tive en­vi­ron­ment for SA man­u­fac­tur­ers,” Com­brinck adds, point­ing to higher elec­tric­ity and labour costs.

The SA unit of ArcelorMit­tal is de­pen­dent on the global econ­omy, which is still strug­gling more than five years af­ter the global eco­nomic cri­sis curbed de­mand for steel prod­ucts.

Worse still, the do­mes­tic econ­omy ex­panded at a weaker pace than ex­pected in the first quar­ter, fuelling fears in some quar­ters that the 2% growth pro­jec­tions for this year might be too op­ti­mistic.

The steel in­dus­try feeds off the con­struc­tion sec­tor, which in turn re­lies on gov­ern­ment in­fra­struc­ture spend­ing, which has slowed down since the 2010 Fifa World Cup boom.

This sce­nario has helped de­flate stock prices on the JSE, forc­ing Evraz Highveld Steel & Vanadium into a busi­ness res­cue ear­lier this year. The coun­try’s sec­ond-largest steel pro­ducer peaked at R190/share in 2008 be­fore plum­met­ing to R1,65 when it was sus­pended.

ArcelorMit­tal SA, which pro­duces 5 Mt of liq­uid steel prod­ucts an­nu­ally, faces the prospect of more cost pres­sures if Eskom’s ap­pli­ca­tion for an ad­di­tional 12,6% tar­iff hike is granted. This will be on top of the 12,67% al­ready granted by energy reg­u­la­tor Nersa.

An es­ti­mated 50% of the com­pany’s costs are raw ma­te­ri­als, which in­clude im­ported cok­ing coal. Another 30% of costs are elec­tric­ity, trans­port and a few other in­puts.

“I don’t see the prospects for the com­pany im­prov­ing in the short term. I think the op­er­at­ing en­vi­ron­ment in SA is very dif­fi­cult, given the rel­a­tively mil­i­tant labour sit­u­a­tion, the poor econ­omy, reg­u­la­tions and the cur­rent elec­tric­ity sup­ply prob­lems,” says I-Cap­i­tal MD Lance Wil­liams.

Com­mand­ing a mar­ket cap of just R7bn cur­rently, ArcelorMit­tal SA was worth well over R35bn in 2010 and peaked at R265/share in 2008. This high­lights the bear­ish sen­ti­ment to­wards the stock, which suf­fered a net loss of R158m in the 2014 fi­nan­cial year.

The com­pany, whose top share­hold­ers out­side of its Euro­pean-based par­ent, ArcelorMit­tal, in­clude the In­dus­trial De­vel­op­ment Cor­po­ra­tion and the Gov­ern­ment Em­ploy­ees Pen­sion Fund, re­it­er­ated in its first-quar­ter up­date that it would con­tinue to cut costs.

To­tal sales vol­umes slipped 4,9% in the three months to March 2015 from a year ago, dragged down by ex­ports, which slumped 43% to 153 000 t.

“Un­til global de­mand for steel looks bet­ter and elec­tric­ity sup­ply in SA im­proves, I would not be ex­pect­ing a long-term ro­ta­tion into this counter,” says Gryphon As­set Man­age­ment port­fo­lio man­ager Cas­parus Treur­nicht.

Another chal­lenge ahead for the be­lea­guered com­pany, which em­ploys more than 9 000 peo­ple, is gov­ern­ment’s pro­posed car­bon tax, which is ex­pected to take ef­fect next year.

ArcelorMit­tal SA has ar­gued that the pro­posal will un­der­mine its com­pet­i­tive­ness as im­ported steel doesn’t carry this cost base. It adds that there are lim­ited op­por­tu­ni­ties to re­duce car­bon emis­sions in the iron and steel pro­duc­tion process.

SA is one of the largest pol­luters per capita in the world‚ be­cause of its re­liance on coal-fired power plants.

“Once it be­comes clearer that one of the trends has started to change, you should con­sider in­vest­ing. If they don’t, then Evraz will not be the last com­pany to go un­der in the SA man­u­fac­tur­ing space,” Com­brinck says.

Pic­ture: THINKSTOCK

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