Dipula, Spar, Ascendis, ArcelorMittal SA, Quantum Foods
ArcelorMittal South Africa (Amsa) has been in the news recently — most of it, unfortunately for Africa’s largest steelmaker, for the wrong reasons. So perhaps it’s best to look at the bit of good news first.
After various delays the blast furnace at one of Amsa’s major plants, at Newcastle in KwaZulu-Natal, has been relined and refurbished and should be firing at full production about now. That’s a good sign for the future — having the blast furnace out of commission cut the production of long steel, with output down 9% to 690 kilotons in the six months to end-June compared to the same period the previous year, and long steel exports down 17% to 125 kilotons. The refurbished furnace will add to output in the final quarter of the year, though whether that has much effect on financial results remains to be seen.
Another positive factor is the exchange rate, which helped Amsa offset steel and iron ore price weakness. But the exchange rate is like a casino and cannot be relied on.
What’s more certain is that steel and iron ore prices are going to continue slipping down.
Much of the bad news stems from China, which produces about half the world’s steel and plans to export more than 80million tons of it this year, according to the China Iron & Steel Association. It’s a familiar, probably unfair, accusation, but China is being blamed for flooding the world with cheap steel exports. Amsa says this is putting pressure on it and is affecting the price of steel. A Bloomberg report in the Washington Post on November 12 said record steel exports from China were undercutting foreign rivals on price, “triggering complaints from Seoul to SA that may signal the start of a trade conflict”.
Locally, Amsa says the prolonged mining strike and the metal and engineering strike have affected demand for steel and the investment climate. Accordingly, steel consumption dropped 16%.
Of more concern, though, is the downward trend in global prices. Iron ore is 19% down to $112/ton, after hitting a record low of $93/ton in June. There’s little Amsa can do about that. However, CEO Paul O’Flaherty told Business Day TV last month it was seeking duties on steel imports from China.
O’Flaherty was a top executive at Eskom before becoming CEO of Amsa in July, replacing the previous CEO, Nonkululeko Nyembezi-Heita, who resigned near the beginning of the year. Perhaps O’Flaherty should use his previous connections to try to organise a discount for Amsa on one of its largest input costs.
Amsa is also under pressure from the government to introduce a “developmental price” for steel, in other words to reduce its selling price. Says Trade and Industry Minister Rob Davies: “If ArcelorMittal were able to reduce current prices by 10% then I think that would amount to a very significant injection into industries using steel product.”
Amsa is alleged to have put some small manufacturers out of business, either by driving up the price of their steel products or refusing to supply them with the metal they needed.
Amsa says in its outlook statement it expects financial results to “remain under pressure”, and this is hard to disagree with.
This is not a share to purchase — why buy a company that has not paid a dividend since mid-2011 and probably won’t be making a payout for some time? If what existing shareholders paid for the share is not too much more than the current price (about R32/share in mid-November) it might be time to cut losses and sell.