Financial Mail - Investors Monthly - - Contents - Shaun Har­ris

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.


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