ArcelorMittal SA’s perfect storm of woes

The decision by ArcelorMittal South Africa (Amsa) to wind down its long steel business in the face of cut-price imports from China has blown a R1.1 billion hole in its balance sheet, contributing to the R5.1 billion headline loss for the 2024 financial year.

The R1.1 billion operating loss in its long steel business is nearly double the R600 million reported in 2023. Another blow to the income statement was the 209 000 tonnes in lost production due to blast furnaces being out of operation for several weeks.

Amsa’s troubles were aggravated by its crippling reliance on state-owned suppliers of energy and transport. It spent R3.2 billion buying electricity from Eskom in 2024, up 14% on 2023.

Over the past decade, energy tariffs paid by Amsa have gone up 835%, while poor performance by Transnet Freight Rail resulted in lost production and sales, with rail tariffs outstripping inflation over the last three years.

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“We continued to pay state-owned enterprises (SOEs) what we maintain are excessively high tariffs for rail and electricity,” says Amsa’s annual report.

Source: Amsa 2024 Annual Report

Amsa hit the panic button last year when the scale of imports from China began to threaten the viability of its long business. It called on government to raise tariffs on steel imports to save SA’s domestic steel production, and to review its subsidisation of scrap-based steel makers that compete with it.

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Impairments

The group’s deteriorating cash position – aggravated by R2.7 billion in impairments in the long business over the last two years – was softened when the parent company increased its shareholder loan in Amsa to R5 billion from R3.7 billion. To further preserve cash, Amsa cut back on its capex by almost a third to R902 million.

The Industrial Development Corporation (IDC), which is heavily invested in competing scrap mills, stumped up a R1 billion short-term loan for Amsa, another R380 million loan and an additional R1.68 billion shareholders’ loan with the intention of extending the life of its longs business.

Amsa has agreed to defer the winding down of its long steel mills, giving the IDC time to conduct due diligence on the best path forward for the company.

Meanwhile the International Trade Administration Commission of South Africa (Itac), which monitors SA’s tariff regime, is undertaking a massive review of steel tariffs which it expects to complete by June.

Amsa will require recapitalisation and refocusing its business around the profitable flat steel markets. Despite the liquidity challenges, there is no threat to its going concern status.

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“In the short term, we are doing everything we can to put our Flats business and market coke operations on a more sustainable footing,” says CEO Kobus Verster.

“It is indeed gratifying that our Longs business will continue to operate for at least a further six months.

“The global trade and tariff environment faces considerable uncertainty in the coming months, likely resulting in a new world trade order,” Verster adds.

“Current trade flows are characterised by large low-cost imports which are being addressed by almost all countries with the imposition of extraordinary measures.”

Amsa chair Bonang Mohale says a scaled-down, focused Amsa will be able to make a meaningful contribution to economic growth and redistribution. The company’s troubles have been exacerbated by a prolonged period of economic stagnation.

“As much as we have struggled to remain profitable in the recent past, the South African economy has barely limped along, GDP rarely growing by more than 2% per annum [apart from the post-Covid bounce back]. At the same time, the country’s population has grown at a rate approximating the paltry increases in GDP.

“In real terms, South Africans’ purchasing power has gone backwards and our unemployment rates are worse even than some countries that are at war or facing serious civil strife,” says Mohale.

“In our country, poverty and inequality are only getting worse.”

Source: Amsa 2024 Annual Report

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Amsa’s net assets are now R5 billion smaller than in 2022, and there may be further impairments to come.

The chart above shows the percentage of apparent steel consumption has fallen about a third since 2000, while imports now account for 33.6% of local consumption.

World steel production for 2024 dropped 0.9% on top of declines of 1.7% and 4% in 2023 and 2022.

With a surge in exports out of China, net realised prices fell to levels last seen in 2015.

This article was republished from Moneyweb. Read the original here.