Spoke in the steel wheel
THERE ARE TWO sides to thirdquarter results from Africa’s largest steel maker – ArcelorMittal – and the outlook depends on which side of the production fence observers sit. Shareholders will probably take heart at the shiny numbers for the third quarter but be a little dismayed that earnings are expected to be lower this quarter as demand for steel slackens. Steel users, especially the smaller producers of products for the consumer market, will be hoping that the price of steel in SA continues to ease.
Then again, shareholders will be pleased to see ArcelorMittal is reacting to reduced demand by cutting production by more than 30%. Again, smaller users – typically of flat steel – will fear the worst as the production cuts “will differ from plant to plant and by product category”. Flat steel users will face the worst of that: if they can’t get the steel they need there’s little option but to wait in line. Importing steel, some small users have told Finweek before, isn’t really an option in the cut-throat steel business.
However, reduced steel production is currently a global trend and there’s little doubt ArcelorMittal in SA is taking its cue from the top. On the same day the SA-based group announced its third quarter results, Lakshmi Mittal, chairman and CEO of the global group, which is listed on a number of stock exchanges, including New York and Paris, said: “The current period of de-stocking requires that we make appropriate production cuts to seek to rebalance supply and demand.”
That’s no doubt also part of the production cut motivation in SA. CEO Nonkululeko Nyembezi-Heita says in its official release with results: “In the light of the current economic conditions, the normal seasonal slowdown in domestic activities during December and relatively high inventory levels, we expect lower earnings in the fourth quarter, followed by a gradual market recovery in 2009.”
As more than one steel market watcher observed, the recovery next year is the million dollar question. Nyembezi-Heita says that SA’s Government remains committed to its infrastructure rollout plans but there’s a fall in demand from consumer sectors and “a more gradual decline in demand from the industrial and infrastructure sectors”.
The outlook for steel exports is more clouded, with much depending on some stability in developed market economies in the US and Europe. That will affect ArcelorMittal’s Saldanha works, which is very reliant on the export market. Spokesman Sven Lunsche says lower production will allow routine maintenance, shutdowns and staff training at the Saldanha plant and Vanderbijlpark works. He adds there will also be “temporary closure” of some furnaces and kilns at both plants.
It’s probably not that hard to grow revenue by a glowing 77% (to R13,3bn compared to quarter three in 2007) and headline earnings by 257% to R3,8bn when ArcelorMittal had a 47% increase in prices and 21% increase to volumes to back it through the quarter.
However, its results were good and also show SA is one of the global group’s high margin operations. Internationally, ArcelorMittal grew revenue by 38% to US$35,2bn and earnings before interest, tax, depreciation and amortisation by 76% to $8,6bn. With those numbers it’s little wonder Lakshmi Mittal is keen to rebalance supply and demand.
But in SA the group was also hit by commodity prices, which pushed up raw material costs. What ArcelorMittal calls the “cash costs” per ton of billets increased by 86% year-on-year and hot rolled coil by 69%. However, many commodity prices have since come off. So isn’t ArcelorMittal
getting some relief? Lunsche says major raw materials, such as iron ore and coal, are at contracted rates so are essentially a fixed cost “though we’ll be negotiating those prices”.
With declining demand in SA and exports looking a little shaky ArcelorMittal is focusing on cutting costs. It says key capital projects are being “reprioritised” – though it remains committed to boosting capacity to 10m t/ year over the next five years. That may be an answer to concerns the group was considering quitting SA if not successful with its appeal against the R692m fine and prohibitions by SA’s Competition Tribunal for behaving like part of a steel cartel.
Some jobs are also on the line. ArcelorMittal says temporary labour contracts will be terminated, which could affect more than 2 000 workers. Overtime has been suspended and some staff redeployed. At this stage retrenchment of permanent staff isn’t under consideration.
So is a tighter ship facing weaker demand worth buying, at around 8518c/share, the price a few hours after results were released? Initial market reaction took 1,4% off the share price – but that was in a falling market, so may not mean much.
At the current price ArcelorMittal looks quite cheap for investors strong enough to face what could well be more issues in the steel industry.