De­clin­ing de­mand

Spoke in the steel wheel

Finweek English Edition - - Companies & Markets - SHAUN HAR­RIS

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.

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