Over-regulation, high production costs put ArcelorMittal on the back foot
JOHANNESBURG – ArcelorMittal South Africa (Amsa) has said it is fighting losing battles behind the scenes against over-regulation and high production costs, including that of electricity, as the six months to June indicate a bruising period in which it made a R222 million loss from a R1.2 billion profit a year earlier.
At the results presentation yesterday, chief executive Kobus Verster said he was concerned that electricity, port and rail tariff hikes had already made the group uncompetitive internationally.
“These unaffordable increases resulted in R168m in additional costs against the comparable period. “Winter tariffs add on average R110m to the monthly electricity cost of the company,” said Verster. Verster said the company had so far received negative feedback from Eskom, which had turned down its proposed tariff reduction, adding that Amsa planned to convince Eskom otherwise.
“They are saying their short-term marginal cost is equivalent to where their tariff is. Hence there is no opportunity for tariff relief. We are busy challenging the process and we are speaking to the company,” Verster said.
Amsa last month said it would embark on a restructuring exercise that would possibly result in 2 000 job losses, citing a difficult domestic economic environment. The group warned that South Africa’s steel consumption was at a 10-year low as it posted a headline loss of R638m compared to headline earnings of R54m for the same period last year on lower sales prices and volumes, higher electricity, rail and port tariffs, and sharp increases in iron ore.
“In South Africa we need a 1.8 percent economic growth rate to have flat steel consumption,” he said. South Africa’s steel industry is struggling to compete globally in an oversupplied market as runaway costs, low demand and increasing imports weigh heavily on operations.
“Domestic steel demand will remain under pressure until real infrastructure spending and economic growth improve,” said Verster as the economic outlook slumped 3.2 percent in the first quarter and the unemployment rate rose to 29 percent in the quarter. Verster said the group would reach break-even when the economy grew by 1.8 percent.
Revenue decreased by 5 percent to R21.74bn primarily as a result of lower sales volumes of 9 percent, and on a positive note, the weak exchange added R1.2bn to income. In a bid to curb rising costs, Verster said the group would intensify engagements with key stakeholders to reduce the costs of electricity, rail and iron ore.
Amsa also said yesterday that it had entered into an agreement to purchase the Highveld Structural Mill for an initial cash amount of R150 million and an additional R150m conditional upon the conclusion of a commercial arrangement for the long-term supply of sizeable mainline rail volumes.
Ian Cruickshanks, the chief economist at the Institute for Race Relations, said it would be difficult for Amsa to turn the corner.
“It is going to be difficult to build revenue. The government has no money, they are running short of money for infrastructure projects. “Amsa is not a stock you put the cash of orphans and widows. The stock is very risky,” said Cruickshanks. Amsa shares gained 3.33 percent on the JSE yesterday to close at R2.48.