A scary case of meltdown and metal fatigue

It’s been a steep downward plunge for the steel producer, and no change in sight

competitive environment for SA manufacturers,” Combrinck adds, pointing to higher electricity and labour costs.

The SA unit of ArcelorMittal is dependent on the global economy, which is still struggling more than five years after the global economic crisis curbed demand for steel products.

Worse still, the domestic economy expanded at a weaker pace than expected in the first quarter, fuelling fears in some quarters that the 2% growth projections for this year might be too optimistic.

The steel industry feeds off the construction sector, which in turn relies on government infrastructure spending, which has slowed down since the 2010 Fifa World Cup boom.

This scenario has helped deflate stock prices on the JSE, forcing Evraz Highveld Steel & Vanadium into a business rescue earlier this year. The country’s second-largest steel producer peaked at R190/share in 2008 before plummeting to R1,65 when it was suspended.

ArcelorMittal SA, which produces 5 Mt of liquid steel products annually, faces the prospect of more cost pressures if Eskom’s application for an additional 12,6% tariff hike is granted. This will be on top of the 12,67% already granted by energy regulator Nersa.

An estimated 50% of the company’s costs are raw materials, which include imported coking coal. Another 30% of costs are electricity, transport and a few other inputs.

“I don’t see the prospects for the company improving in the short term. I think the operating environment in SA is very difficult, given the relatively militant labour situation, the poor economy, regulations and the current electricity supply problems,” says I-Capital MD Lance Williams.

Commanding a market cap of just R7bn currently, ArcelorMittal SA was worth well over R35bn in 2010 and peaked at R265/share in 2008. This highlights the bearish sentiment towards the stock, which suffered a net loss of R158m in the 2014 financial year.

The company, whose top shareholders outside of its European-based parent, ArcelorMittal, include the Industrial Development Corporation and the Government Employees Pension Fund, reiterated in its first-quarter update that it would continue to cut costs.

Total sales volumes slipped 4,9% in the three months to March 2015 from a year ago, dragged down by exports, which slumped 43% to 153 000 t.

“Until global demand for steel looks better and electricity supply in SA improves, I would not be expecting a long-term rotation into this counter,” says Gryphon Asset Management portfolio manager Casparus Treurnicht.

Another challenge ahead for the beleaguered company, which employs more than 9 000 people, is government’s proposed carbon tax, which is expected to take effect next year.

ArcelorMittal SA has argued that the proposal will undermine its competitiveness as imported steel doesn’t carry this cost base. It adds that there are limited opportunities to reduce carbon emissions in the iron and steel production process.

SA is one of the largest polluters per capita in the world‚ because of its reliance on coal-fired power plants.

“Once it becomes clearer that one of the trends has started to change, you should consider investing. If they don’t, then Evraz will not be the last company to go under in the SA manufacturing space,” Combrinck says.

Picture: THINKSTOCK