A cocktail of high inflation, rising interest rates, unprecedented load-shedding in the last six months, a weaker pricing environment and slower demand from steel-consuming sectors have caused something of a meltdown at steel giant ArcelorMittal SA (Amsa).
This has shone a spotlight on the steelmaking operating environment and Amsa management’s ability to implement its ‘RRR’ strategy to reposition it as the champion of SA’s manufacturing backbone, restructure it to ensure international cost competitiveness and revitalise its balance sheet to improve sustainability and enhance flexibility and agility.
The lack of a permanent CFO for a lengthy period has also done little to boost investor confidence, with the share price slipping 50% over the last year.
“The combination of high raw material costs and the poor performance of local SOEs — Transnet and Eskom — adding substantially to that cost base is hurting Amsa right now,” Chronux Research analyst Rowan Goeller told Business Day.
“Despite a strategy to localise raw material procurement Amsa still faces a high raw material basket price relative to steel prices.”
At the interim results presentation planned for July 27, shareholders will expect management to account for what has gone wrong in the half-year, actions being taken and what the investment case for Amsa looks like amid the low demand environment.
This comes after Sub-Saharan Africa’s largest steel producer told shareholders that despite holding a previously upbeat outlook for the half-year period, it had underestimated the effects of weak demand in the market and was unable to respond nimbly and quickly enough to the prevailing market conditions.
Production was held back by unrelenting power outages while the movement of product was hindered by Transnet’s challenges to keep the rail system functional, and the company said this would likely see its earnings for the six months to end-June decline 111%-114%.
The news sent the share price plunging 44% to R2 on July 18 — its lowest level since February 2021.
“Stop-start must kill efficiencies,” said chief global equity strategist at Sasfin Securities, David Shapiro. He added other issues facing the firm were getting product out of the factory to customers, levels of demand, input costs, and “availability of trucks that have been monopolised by the mining companies.”
In recent years Amsa has been struggling to shore up its production to meet domestic demand, with re-rollers, such as Duferco, having essentially been forced to exit the local market because it cannot access the raw hot-rolled coil it needs from Amsa, while tariffs on imported product make rerolled product uncompetitive.
Amsa’s primary steel production has been dwindling. In 2022 it manufactured 2.46 million tonnes of finished primary steel, which was 20.4% lower than the amount produced in 2021 and 44.1% lower than its output of 4.4 million tonnes in 2019.
Meanwhile, an influx of imports, which the government has tried to arrest through tariffs to protect local producers, has permeated the domestic industry. Currently, SA imports more than 25% of domestic steel demand, and in many cases the imported component is of lesser quality, according to industry insiders.
However, Amsa has bemoaned that despite working to improve its efficiencies through the application of its RRR strategy introduced in the 2021 financial year after the havoc of pandemic-related lockdowns and which was meant to enhance flexibility and agility, local demand has been stubbornly low.
Goeller said Amsa’s multiyear cost-cutting and efficiency program is helping, but that has come with sacrifices from the workforce.
“The greater question should be squarely thrown at the government — does SA want a sustainable local steelmaking industry with the attendant job creation in upstream and downstream industries, and current account implications, or do we want to further destroy the manufacturing base of SA,” he said.
Demand for steel mainly comes from the mining, construction, automotive and manufacturing sectors, but those industries are also grappling with the effects of highinterest rates and inflation which are slowing consumer spending.
The SA Iron and Steel Institute (Saisi) paints a mixed picture of the steel sector’s demand trends and told Business Day that while the second half of the year is expected to be better than the first half as economic indicators improve, the outlook for steel consumption for 2023 could be 7-8% lower than last year.
“Core inflation is moving back into the target range of 3-6% which will lessen the pressure to increase interest rates. This will definitely improve consumer confidence,” Saisi said.
“The winter cold spell will be over and the electricity supply could improve. Some of the major projects such as the Eskom transmission lines will most probably also emanate in the latter part of the year, improving steel demand.”
Shapiro warned that with miners and producers under pressure, tax receipts are likely to fall short of forecasts, which is a “big worry.”
Now all eyes will be on Amsa CEO Kobus Verster and his team to give assurance of a mitigating plan and a growth strategy to catapult the firm back into profitability during the second half of the year.
“I suspect there will be big questions from investors,” said an industry analyst pointing to Amsa’s balance sheet leverage.
“I don’t know if there is a viable way for them to resolve capital structure,” he said. “Price support from the government is one thing, but is there even enough demand to run at full production,” he questioned.
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