Steel­ing for a white knight

If gov­ern­ment doesn’t act now, it will be a dis­as­ter for the in­dus­try, writes Fifi Peters

Financial Mail - Investors Monthly - - Feature -

In­vestors in the steel in­dus­try have taken a beat­ing in re­cent years — and there’s no sug­ges­tion the tide is go­ing to turn any time soon.

This is bad news for ArcelorMit­tal SA (Amsa), the only steel com­pany on the JSE not in busi­ness res­cue.

ArcelorMit­tal SA CEO Paul O’Fla­herty has pleaded with gov­ern­ment to come to its aid and pro­tect an in­dus­try that has been hit by Chi­nese steel man­u­fac­tur­ers al­legedly “dump­ing” the me­tal cheaply in SA and else­where in Africa.

Gov­ern­ment’s re­sponse will be crit­i­cal for a com­pany which has seen its stock price plunge 73% in the past three years, while the JSE’s all share in­dex has climbed 41% in that time.

This month, SA’s largest steel pro­ducer, which sup­plies more than 70% of the do­mes­tic mar­ket, saw its share price perk up from its low of R10,80 reached in July — the weak­est level in more than a decade — to around R12.

But even if gov­ern­ment comes rid­ing to its res­cue, an­a­lysts aren’t con­vinced.

Ni­cholas Sorour, a port­fo­lio man­ager at Sas­fin Se­cu­ri­ties, says in­vest­ing in the steel maker right now would be like “try­ing to catch a fall­ing pi­ano”. Sorour is rec­om­mend­ing that his clients stay away from the com­pany, ar­gu­ing that “the risk is too high”.

Sorour cites the col­lapse in the in­ter­na­tional prices of steel, amid a sup­ply glut as the world’s big­gest com­modi­ties con­sumer, China, re­duces de­mand, as very good rea­sons to be wary.

“In my opin­ion, Amsa is be­low in­vest­ment grade. It does not tick any of the boxes that Sas­fin looks at as in­vest­ment ma­te­rial,” says Sorour.

“I would rather be in­vest­ing in in­dus­tries where you are see­ing growth. Those that are thriv­ing, not [just] sur­viv­ing,” he says.

There aren’t many of those around right now, but Sas­fin favours to­bacco (such as Bri­tish Amer­i­can To­bacco), al­co­hol (such as SABMiller) and health care as de­fen­sive in­dus­tries bet­ter placed to ride out the storm.

The struc­tural prob­lems fac­ing SA’s man­u­fac­tur­ing in­dus­try aren’t go­ing away any­time soon

Pic­ture: iS­TOCK

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