BEE partner stays with ArcelorMittal SA
Since a peak in June 2008, the company's shares have dropped by more than 98%
ArcelorMittal South Africa's empowerment partner, Likamva Resources, is willing to increase its stake in Africa's biggest steel producer.
This is despite the prospect of asset sales and other restructuring plans to boost business in a global market flooded with cheap steal, and a domestic market in its second recession in less than a decade.
Noluthando Gosa, a partner at Likamva, said the firm would not hesitate to reinvest, increasing its 17% stake in the loss-making business. The last time ArcelorMittal SA (Amsa) made a profit was in 2010.
Imports from China
Gosa added that if resources and funds permitted it, Likamva would inject the capital needed to help the company. However, she said, the company had not asked shareholders to do so.
Last month, Amsa - which produces about 70% of South Africa's steel - reported a 3.8% fall in the country's steel consumption in the first half of the year in the wake of subdued economic growth and large steel imports from China.
Since a peak in June 2008, the company's shares have dropped by more than 98%.
In November 2015, Amsa undertook a right issue to raise R4.5-billion to reduce its debt levels.
Any changes in Amsa's shareholding would have to be sanctioned by its London-based parent, the world's biggest steel producer.
The company, owned by Lakshmi Mittal, one of the world's richest men, acquired its controlling stake when the company was formed in 2001, after the break-up of Iscor. ArcelorMittal owns almost 68% of its JSE-listed subsidiary.
The parent company said it was aware of the challenges facing its South African subsidiary, but remained committed.
"Given the ongoing challenges, several further initiatives are under review by Amsa's executive team to improve the company's performance. We expect progress soon," an ArcelorMittal spokesman said.
ArcelorMittal was doing well, having gained from the high steel prices in the first half of the year.
It hoped prices would boost its revenue from the $56.8-billion recorded in 2016. The company's net debt in the second quarter of this year declined to $800-million.
Wade Napier, an analyst at Avior Capital Markets, said the parent company was unlikely to sell its stake in the local business, having worked so hard to "gain a licence to operate".
And if it were to exit, he said, any sale would be likely to attract a significant discount.
Amsa's smaller rival, Highveld Steel, struggled to secure a buyer before eventually being placed in business rescue in 2015.
Makwe Masilela, an analyst at BP Bernstein, said ArcelorMittal did not have to sell the whole business because its local operations did not have competition.
"They just need to change the way they do business, and they need the support of stakeholders such as the government and Eskom," he said.
Amsa is exploring initiatives to improve efficiency and cut costs. This includes short- term options such as productivity improvements, interventions by the government on import duties, the sale of its non-core assets, and assessing its footprint.
Tariffs help the company only with domestic sales volumes and so far "import duties on their own have not been very effective in stemming the flow of cheap imports into the country", the spokesman said. The company said about half a million tons of steel were imported into South Africa in the first half of this year.
Amsa is awaiting the implementation of safeguard duties in the second half of this year, which should help the company's earnings to some extent, Masilela said.
Streamlining product grades
Napier said the restructuring was likely to help the company extract efficiencies by streamlining its product grades. "This cash could allow Amsa to operate at a loss for a couple of years, with the expectation that South African steel demand or pricing improves."
The company was unlikely to collapse because some parts of the business made sense. Napier said: "What is feasible is, if losses continue, it could become a slimmed down version of Amsa."
Selling the business was not an option because Amsa was confident the measures it was implementing would yield positive results.
It hoped the initiatives would go "a long way in helping us [Amsa] to stabilise our business and put it back on a path to profitability", the Amsa spokesman said.