Crises require tough decisions
Mining and steel industries need to face up to ills
CASH-strapped ArcelorMittal SA has reason to appreciate the fact that platinum miner Lonmin announced its rights issue before the steel maker did its own.
That’s only because Lonmin looks so pathetic, with a rights issue that is priced at the penny stock level of 1 pence per share, making ArcelorMittal look less bad.
In both cases, the companies are going to the market to raise sums of cash that are many times their market value, in order to cut their debt and enable them to stay alive.
The steel maker has the comfort, however, that its controlling shareholder, London-based ArcelorMittal, has given its full support to the proposed rights issue — and will underwrite the whole R4bn-R4.5bn issue. That’s not surprising since the South African operation already owed its foreign parent R3.2bn, so it’s a case of substituting equity for debt, but if other shareholders aren’t keen to follow their rights, the South African group’s shareholder stands ready to put in the extra cash needed to help it become more competitive.
Lonmin’s shareholders, by contrast, are predictably baulking at a rights issue priced at a spectacular 94% discount, and it would be the third time in six years that the company has had to tap the market for cash. The share price has lost 60% just in the past week.
A group of banks has agreed to underwrite Lonmin’s almost R5bn rights issue, but without shareholder approval, the deal can’t go ahead. And there is a big question mark over whether it even should.
With platinum prices far off their peaks and unlikely to recover any time soon, it’s clear that the only way to support the platinum price is for a significant amount of supply to exit the market.
That’s been clear for some time now. And arguably, for a producer that is as financially ailing as Lonmin to be going back to its shareholders yet again for a bailout is just a case of kicking the can down the road yet again. The tough decisions are being avoided, and not only by the company, but by some of its shareholders too, most notably the Public Investment Corporation (PIC), which has supported the rights issue.
The government must take the blame for at least part of the industry’s woes. It has put obstacles in the way of producers right-sizing their operations, blocking retrenchments and other measures that have helped Lonmin better able to weather the downturn.
Preserving jobs while putting at risk the public servants’ pension money managed by the PIC may not be such a good idea for SA’s economy in the longer term.
The government has only belatedly recognised that the steel industry is really in trouble with a flood of cheap Chinese imports and dwindling domestic demand.
But it has been set on getting “developmental pricing” out of ArcelorMittal’s South African operations, making it the only government to demand such concessions. And
At least there has been some honest talk between the steel industry and the government. It’s not the case in platinum
it was only after all SA’s steel producers started to issue retrenchment notices, that it finally woke up to the dire state of the industry.
Streamlining will be needed if the industry is to weather the commodities storm. Happily for the industry, however, the government now seems open to considering the kind of support ArcelorMittal is asking for in terms of protection from dumping by the Chinese and more general tariff support. There are constructive talks with the trade unions on working practices, which could help ArcelorMittal to adapt.
But there are no guarantees yet that the company, or the steel industry, can be saved. At least there has been some honest talking between the industry and the government. It’s not clear that is the case in platinum.
Politics clearly contributed to the inability to respond to tough economic circumstances. That must change before more damage is done.