ArcelorMittal in the abyss: Is it time to buy?
Many have asked if ArcelorMit t a l Sout h Africa (Amsa) has reached t he bottom yet, either because they’re at their wits’ end with their investment in the steelmaker, or they wish to be the early bird that catches the share at rock-bottom prices.
With the stock down 85% over the past five years, and down 63% over the past year, Amsa shareholders have had a tough time. Much of this negative sentiment is due to weak demand and oversupply in the global steel market, although domestic issues such as a furnace failure at its Newcastle plant, rising costs and electricity constraints, have added to its woes.
The loss-making steel producer – Africa’s largest producer of the metal – has asked government to impose a 10% import duty on steel to provide some protection to local producers (also see page 15). Cheap steel imports are said to total about 1.6m tons a year, a substantial amount considering SA’s domestic production totalled 7.2m tons in 2014, according to estimates from the World Steel Association.
Amsa’s biggest rival, Evraz Highveld Steel & Vanadium, entered business rescue proceedings in July and was forced to halt production in an attempt to save costs. Amsa has also warned that it may have to shut or partially shut its Vereeniging operations, where operations started in 1911. A decision on t he f uture of t he plant, which employs 1 200 people, will be made by the end of August. Highveld, which is majority-owned by Russian oligarch and Chelsea footbal l c l ub owner Roman Abramovich’s Evraz group, may retrench nearly half of its 2 240 employees while it seeks new funding.
With steel prices under pressure, it is hard to see any upside for the industry at this point. Globally, major low-cost producers are unlikely to cut output, as they are using the low market prices to gain market share and force high-cost producers out of business, according to a review from Basemetals.com. In addition, cheap oil prices will keep shipping costs low for the seaborne market – further helping them in that respect. This is basically a supply and demand matter, and with global steelmakers’ input costs (iron ore and energy) falling, low-cost producers will look to boost revenues by increasing exports, all of which is likely to further weigh on prices.
A potential change in sentiment was signalled by the weekly RSI breaching its mediumterm resistance trendline two weeks ago. The monthly RSI also bounced from a f ive-month oversold position. Upside above R15.50 on the price chart would end the steeper bear trend, and possibly fuel gains to either the R27 mark or t he major resistance t rendline. A positive breakout out of the long-term bear trend would be confirmed above R30.10, where investors should initiate an aggressive long position. At this point investors could buy marginally above R15.50 and again above R20.70.
Abandon the position below R10.20 as Amsa could head towards its all-time low of R2 a share.
R10.22 - R42.25