ArcelorMit­tal in the abyss: Is it time to buy?

Finweek English Edition - - KILLER TRADE - BY MOXIMA GAMA

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.

LIKELY SCE­NARIO:

Aban­don the po­si­tion be­low R10.20 as Amsa could head to­wards its all-time low of R2 a share.

AL­TER­NA­TIVE SCE­NARIO:

R10.22 - R42.25

- 60.65%

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