Acquisition of Highveld Structural Mill announced.

ArcelorMittal South Africa’s operating profit decreased from a profit of R1 224 million in June 2018, the first half-year profit in almost a decade, to a loss of R222 million. This was largely as a result of lower sales prices and volumes, higher electricity, rail and port tariffs, and sharp increases in primary raw material prices, notably iron ore. This resulted in a headline loss of R638 million compared to headline earnings of R54 million for the same period last year.

After a positive 2018, the global steel industry is facing challenging market conditions in the current year as a result of weaker international steel prices, increases in primary raw material costs and lower demand. Locally, the South African steel industry continues to face significant challenges. The domestic economy has remained close to recessionary levels as investment and infrastructural spending in the country remained subdued. In the first quarter of the year, the economy contracted the most in a decade mainly due to the decline in activity in the mining and manufacturing sectors. Business sentiment remains subdued. Apparent steel consumption decreased by a further 2% for the period and is now at 70% of the apparent steel consumption of the first half of 2008 – a 10-year low.

Cheap imports
The group’s results reflect this challenging operating environment during this period. Total steel imports for the six months are 18% higher with flat products imports increasing by 23%. These increases consist mainly of hot rolled coils imported from China, Russia and Taiwan. Imports once again constitute 20% of South Africa’s apparent steel consumption compared to 17% in the comparable period. In order to assist the downstream steel fabrication industry to effectively compete against the import of semi- finished and finished fabricated steel goods additional import tariff protection is required.

Cash preservation and generation, and cost control remain the group’s primary focus areas. The group’s strategic imperative of improving its cost competitiveness against, in particular, China-sourced steel and that of domestic producers, is being severely hampered by structural disadvantages associated with unaffordable electricity, port and rail tariffs and raw material costs.

Increases in electricity, port and rail tariffs have already made the group uncompetitive internationally. These unaffordable increases resulted in R168 million of additional costs against the comparable period. Winter tariffs add on average R110 million to the monthly electricity cost of the company.

International iron ore prices have increased sharply by 28% while steel prices have decreased by 13%. Higher iron ore prices have negatively impacted earnings by R700 million against the comparable period.

Export sales declined due to a decrease in international demand, and, in the case of flat products, the build-up of slab inventory to compensate for the planned repair outage of the blast furnace at Vanderbijlpark Works, enabling the uninterrupted supply of domestic customers.

The two-month unprotected labour strike had no notable impact on sales and production volumes during the period.

Reduction of its carbon footprint is a key imperative for the group. Timing, however, of the introduction of carbon tax effective 1 June 2019, from which imported steel is exempted, will place further financial pressure on the business. This necessitated the implementation of a carbon tax levy on certain steel products, effective 1 July 2019.

ArcelorMittal South Africa’s operating profit decreased from a profit of R1 224 million to a loss of R222 million, which resulted in a headline loss of R638 million compared to headline earnings of R54 million for the same period last year.

The domestic economy has remained close to recessionary levels as investment and infrastructural spending in the country remained subdued, the company said. It recently said it planned to cut more than 2 000 jobs as it struggles with cheap imports, rising costs and a flagging local economy.

The volatility of the rand/USD exchange rate continues to impact the group’s performance. As part of its strategy, the group has embarked on several initiatives to improve efficiencies and address expenditure within its control. More significant measures have become necessary to return to profitability and generate positive cash flows.

Safety remains the group’s number one priority. The group’s efforts to improve its health and safety record resulted in no fatalities at its operations for the period.

Reduction of its carbon footprint is a key imperative for ArcelorMittal South Africa. However, the timing of the introduction of the country’s carbon tax – from which imported steel is exempted – will place added financial pressure on the company.

On 26 July, the company successfully negotiated the refinancing of the borrowing-based facility valued at R4 500 million for three years, on substantially the same terms and conditions as the 2017 facility agreement.

Agreement to purchase the Highveld Structural Mill
Further to this, ArcelorMittal South Africa has entered into an agreement to purchase the Highveld Structural Mill (HSM) for an initial cash amount of R150 million and an additional R150 million conditional upon the conclusion of a commercial arrangement for the long-term supply of sizable mainline rail volumes.

“The HSM is the only facility of its kind in Africa with the ability to produce heavy structural steel, including material for railway lines,” says Verster.

Should such a commercial partner be secured, Verster said ArcelorMittal South Africa would invest in the mill to ensure that the plant was capable of producing heavy structural steel products.

“To upgrade the plant to enable it to produce a certain length of mainline rail will require some investment, but also knowledge transfer. We will not enter into a capital investment programme, however, without having demand certainty.”

Verster projected that the transaction would be completed either by year-end, or during the first quarter of 2020, but said that the effective date of the transaction would be no later than 1 December 2020.

“The localisation of mainline rails will support jobs, strengthen industrial capability and enable export opportunities, while allowing for the transfer of specialised intellectual property and skills associated with rail production.”

Outlook
International steel prices are expected to improve while the raw material basket is likely to be lower. Domestic steel demand will remain under pressure until there is improvement in real infrastructure spending and economic growth. Regulated tariffs will continue to impact the company’s cost competitiveness and the volatility of ZAR/USD exchange rate is also likely to continue to impact the company’s results.

“We will continue to drive interventions as part of our turnaround strategy to ensure the sustainability of the business,” concludes Verster.