ArcelorMittal expects to ride highs into 2021
Cost cuts and strong demand forecasts have made the steelmaker upbeat about the months ahead
Despite reporting a significantly narrowed annual loss, ArcelorMital SA’s share price closed 14.56% lower on Thursday, its biggest one-day fall since July 30 2020.
SA’s only primary steelmaker, which forms part of ArcelorMittal’s global steel empire, has been suffering substantial losses up to now. In its results for the year ended December 2020, which were released on Thursday, the company reported a headline loss of R2bn, down from R3.2bn in 2019.
However, it reported an operating profit of R37m for 2020, thanks to significant improvements in the second half of the year.
The steelmaker expects that strong steel prices and demand, paired with cost cuts, will see its improved performance continue into 2021.
Still, the share price closed lower at R2.70, down from R3.30 at market open on Thursday. The stock has risen 670% over the past 90 days.
The profit was in spite of the effects of the Covid-19 pandemic and lockdown and was attributed to restructuring under ArcelorMittal’s business transformation programme, which saw the company realise R1.5bn in savings in 2020.
Among measures taken to restructure the business it has mothballed its Saldanha steel mill, cut 1,700 jobs, and diversified the supply of raw materials to achieve price flexibility.
“Excluding a return to more restrictive lockdown regulations, it is anticipated that both steel volumes and prices will improve,” said ArcelorMittal CEO Kobus Verster. “Combined with a sustained fixed-cost and asset footprint benefit, we should see the improved performance for the second half of 2020 continue into the first half of 2021.”
The fixed-cost savings were real, Verster said. “If you go back another year it’s bigger — looking from 2018 to 2020, we are talking about a R3bn, permanent, sustainable fixed-cost reduction.” The sustainable savings will make the company much more competitive, he said.
ArcelorMittal saw liquid steel production drop 48% in 2020 to 2.3-million tonnes. The production capacity is, however, 5.5-million tonnes. “To the extent that there is a market … we can grow volumes without substantial growth in the fixed-costs base of the company. So I think from that perspective we have turned a corner and are well-placed for the future — that notwithstanding, we have to continue to drive cost efficiencies.”
Still, Verster advocated that controversial import protections remain in place.
The downstream industry has long complained that the tariff protection on certain steel products does the industry more harm than good. Now, a shortage of certain steel product — after ArcelorMittal’s failure to ramp up production quickly enough to meet a rebound in steel demand in the second half of 2020 — has added fuel to the argument as domestic customers are left without any affordable alternatives.
Verster said the decision not to restart one blast furnace was informed by customer views on what demand would be. Based on that it seemed “illogical” to start the blast furnace. Although in retrospect that decision was wrong, he added.
Verster said the shortage is a short-term issue that should be resolved soon. He said steel industries globally have also struggled to meet revived demand.
Product ordered from abroad would arrive in SA in four months, “if you are lucky”, Verster said. “You’ll get it in four months from us as well”.
Although upbeat about the months ahead, the future is harder to predict.
A country’s economic growth and steel consumption are closely linked and ArcelorMittal said 2% GDP growth is required just to sustain current steel volumes in SA. There is, though, potential to supply into the rest of Africa. “Once [our] cost base is competitive, then obviously [we] can start to export again,” Verster said.
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