Not yet out of the woods

Well, it’s a start.

ArcelorMittal released results for the six months ending June on Friday that saw sales volumes rising but losses deepening in comparison to the same period last year.

The narrative the company has been keenly promoting over the last eighteen months is that cheap Chinese supply is flooding world markets – and must be stopped. “Although global steel prices increased in the first half of 2016, they were still below prices of the first half of 2015,” said Wim de Klerk, in his maiden set of results as CEO of ArcelorMittal South Africa (AMSA).

While liquid steel production was flat at 2.5 million tonnes, steel sales by volume rose by 10% during the period to 2.24 million tonnes, unsurprisingly buoyed by domestic sales that rose by 15% to 1.79 million tonnes.

Part of the increase in domestic sales is courtesy of the support offered by government – AMSA confirmed that 10% import tariffs had been implemented on ten locally-produced products, and there was progress on prescribing thresholds for locally produced steel in government-funded infrastructure projects. “You will only see the full effect of the tariffs in the second half of the year, as some of the tariffs only came into effect as late as June,” said De Klerk in an interview with Mineweb.

The company is at least profitable on an Ebitda basis (Earnings before interest, tax, depreciation and amortisation), albeit less so than last year – R282 million vs R641 million in 2015. The Ebitda margin was just 1.7%. Once depreciation and finance costs were accounted for, the company posted a headline loss of R458 million, or 45 cents per share, which was also worse than the same period last year.

There is hope though – after recapitalising its balance sheet via the rights offer, finance costs of some R362 million should not be seen again anytime soon. As part of the quid pro quo with government, AMSA has to display that it is continuing to drive efficiency, something that is tough to gauge when exogenous factors like the cost of electricity are still rising faster than inflation. Capacity utilisation at its mills continued rising, moving from 80% to 83%. But the company also had a few nasty “one-offs” it had to deal with over the period. This included having to truck iron ore from the Northern Cape to the Vanderbijlpark plant, and importing 65 000 tonnes of metallurgical coal it could not source locally.

The company will avoid the winter tariffs imposed by Eskom at its Saldanha plant. “We have closed for a couple of months to perform the reline [of the furnace], which will add four years to the life of the plant. The reline will also give us more time to consider our long-term options with respect to how we could potentially procure cheaper energy,” said De Klerk. Cheaper energy is an absolute necessity if Saldanha is to keep its doors open.

The company flagged a disagreement with Kumba in the announcement over the costs of rehabilitating the Thabazimbi mine in which it was a co-owner before the mine closed last year. Kumba had asked for an additional R300 million from AMSA for its share of the costs. “We have provided them with an independent study we commissioned, and we expect to come to an agreement with them on the way forward,” said De Klerk.