Signs of optimism at ArcelorMittal SA
Africa’s largest steelmaker is gunning for growth through higher output and a cost-cutting programme
Contrary to the gloomy outlook in the past few years, steelmaker ArcelorMittal SA is bracing for growth.
The company has had its back against the wall for a while now, as it grapples with a myriad problems, particularly cheap imports, weak domestic steel demand and global oversupply of steel.
In the past five years, ArcelorMittal’s shares on the JSE have plummeted 89.24%, compared to the JSE’s industrial metals index, which is down 36.16%. In the same period, the all share index is up 22.59%.
The SA government’s imposition of import protection measures has given ArcelorMittal a breather as the influx of imports in the past few years throttled steel prices and exacerbated the negative effect of a lacklustre local economy. When it released its results for the six months ended June 30, ArcelorMittal said imports had declined by 31%, compared to the same period in 2017.
This decline in imports has coincided with a much-improved outlook in the global steel market. In the first half of 2018, ArcelorMittal increased exports by 26%, compared to 2017.
Edwin Basson, director-general of the World Steel Association, says the global steel outlook for the next 18 months suggests 1.8% growth in 2018, followed by 0.7% next year. “Steel demand is benefiting from the broad and favourable global economic momentum affecting both the developed and developing world at the same time,” Basson says.
However, the steel tariffs and a buoyant international market do not solve all of ArcelorMittal’s problems. The domestic steel market remains constrained because of minimal local investment and infrastructure spending. ArcelorMittal CEO Kobus Verster says there is subdued demand for steel from mining, construction and manufacturing.
ArcelorMittal’s return to sustainable profitability is tied to the health of SA’s economy. “Most steel companies require a reasonably strong local demand to be profitable. We are at the bottom of the cycle at this point in time and steel demand is severely impacted, with the current steel consumption in SA almost at a 10-year low,” says Verster.
As at December 2017, ArcelorMittal had an annual production capacity of 6.1-million tons of liquid steel produced from its facilities in Vanderbijlpark, Saldanha, Newcastle, Vereeniging and Pretoria.
ArcelorMittal’s path to sustainable financial performance will also depend on the steps the company takes to rein in costs. In the year ended December 2017, the company’s revenue increased by 19% but the cash cost per ton of liquid steel of its raw materials basket — which accounted for 50% of costs — soared by 32%.
Verster says the company has prioritised cost containment. “I believe that we are not competitive in terms of some of our controllable costs. We still have to work on our own cost base to become a sustainable business. I think it is naive to think that you can come out of a period of seven or eight years of losses and suddenly start making profits,” he says.
ArcelorMittal has a “structured” programme to reduce costs by $50 a ton in two to three years, to improve the company’s sustainability. “Over a longer term, that should bring us closer to being a sustainable business,” says Verster.
In addition to the reduction of costs, the company wants to increase output from existing assets, hence the decision to restart the Vaal Meltshop plant in Vereeniging.
Stephen Meintjes of Momentum Securities says while there have been positive developments at ArcelorMittal, including the interim profit in August, investors are likely to bide their time and wait for further signs of recovery. “The stock has been ignored for a while,” says Meintjes.
ArcelorMittal shares were down 4.82% at R3.75 on Friday.