ArcelorMittal blames load shedding and high debt for expected loss

Steel producer ArcelorMittal South Africa has warned in a trading update that load shedding and stubbornly high debt will push the company into a loss for the six months to June 2023.

The company says it expects earnings per share to decline from the R2.76 profit per share for the comparative period to a loss within a range of 30 cents and 38 cents per share for the period.

This is a turnaround from the more positive outlook outlined in February when the company advised that, barring the impacts of load shedding and rail service unreliability, trading performance was expected to improve over the first half of 2023.

While international trading conditions benefitted from customer restocking and lower energy costs, ArcelorMittal was hit by ongoing load shedding, negative growth in key sectors such as manufacturing, autos and mining, and high interest rates.

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“The softness of the market amidst the unprecedent severity of the electricity load shedding in the last six months was very much underestimated, which in turn affected the response time with which production could be adjusted in a responsible and well-considered manner,” the company says in a Sens announcement.

“Building and maintaining any semblance of operating rhythm, which is an absolute necessity in running a continuous, integrated steel-making process in a cost-aware manner, proved especially problematic.”

After a three-year profit drought, the company bounced back into profit in 2021 and 2022, but the latest announcement details the hazards of navigating SA’s current environment of spotty electricity supply and high interest rates.

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Debt

Part of the problem the group faces is rising debt. At the December 2022 year-end, net debt was R2.8 billion, up from R1.26 billion the prior year. Net finance charges increased nearly 200% to R758 million for the 2022 financial year due to high interest rates and deferred interest payments.

The latest trading update says the anticipated release of working capital has been more difficult than anticipated, resulting in debt levels remaining high. It says remedial actions are underway to improve net borrowings in the wake of the weaker-for-longer steel trading environment in the region.

Headline earnings per share are expected to decline from a positive R2.71 for the previous comparable period to a headline loss per share within a range of 38 cents and 46 cents.

In the 2022 annual report, the company expected to be able to release working capital in the first half of 2023 by adopting a flexible stance to plant utilisation, though the latest trading update makes it clear this did not go according to plan.

Also weighing on performance is the high cost of coking coal used in smelting, which was up 62% in US dollar terms in 2022, and the flaccid domestic economy.

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This article originally appeared on Moneyweb and was republished with permission.
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