Amsa steel standing despite government doing its worst

Business

COMPANY ANALYSIS

Amsa steel standing despite government doing its worst

The authorities need to take a hard look at how they are harming the competitiveness of SA businesses

Chris Gilmour

Ever since Kumba Iron Ore increased its prices to ArcelorMittal SA (Amsa) significantly, from cost plus 3% a few years ago, it has been a struggle for the steel producer to make profits. However, after years of Amsa posting truly “drek” results, CEO Kobus Verster could take a little satisfaction in announcing a reasonable turnaround in fortunes, in fact into profit, for the interim period to June 2018.
Revenue was up strongly thanks to substantial increases in production volumes, sales and exports, supported by strong prices. Combined with cost containment, there was a much welcome profit in both ebitda (earnings before interest, tax, depreciation and amortisation) level and margin. Verster is “quite chuffed” with this result.
Although the medium-term international steel market has positive fundamentals, supply discipline, and a very strong US dollar price, the strengthening rand can get in the way as it did in these latest results. The international steel price in US dollar terms increased by up to 20%, but rand strength meant Amsa could only enjoy an 8% price increase.One key focus for Amsa in a hopeful recovery is to regain its position on the global cost curve. Having done extensive benchmarking on this, its target is to reduce cost of production by $50/ton over the next couple of years.
However, there are a few obstacles in the way, thanks to the government’s rail transport and energy tariffs that make our steel industry globally uncompetitive. The price of electricity from Eskom puts it at a structural disadvantage to its rest of world peers. Amsa tries to tackle the problem by getting site-by-site tariff dispensations, constantly reducing consumption, and using alternative sources, but the authorities really do need to take a hard look at how they are harming the competitiveness of SA businesses.
The recent Trump tariffs do not hugely affect Amsawhich currently exports a very limited 70,000 tons to the US. This product will have to now find another home and at a different price. However, there are potentially more serious risks coming from the developing trade wars. Verster cautions that when the US does in fact firmly close the door on imports, steel producers in other countries will also be looking for new destinations for their exports and this could eat into existing Amsa markets in East Africa and the Southern African Development Community. Additionally, the unquestionable worry is if trade wars start affecting real global economic growth.Global exports have always been a problem for local producers as they simply do not have the economies of scale to compete with China and many other countries on price. Also, SA is geographically challenged and sending out heavy steel across the deep oceans is an expensive exercise, especially when the starting point for that commodity is expensive compared with steel manufactured in other regions, such as the Far East.
Amsa does not have the economies of scale to be a world-class steel producer. The Mittal parent instituted a comprehensive series of efficiency programmes when it first became a shareholder. But despite cost-cutting and streamlining and taking it as far as possible, Amsa still cannot compete efficiently on the world stage.
Also, domestic demand for steel is poor due to a lack of infrastructure spending and local steel consumption is in a nine-year slump. Manufacturing, mining, building and construction are in the doldrums, and likely to remain so for the foreseeable future. The motor industry is unattractive because although the bulk of volume of a vehicle is steel, the finished value is now only about 5%. The rest is plastics, composite materials, electronics, leather and so on.
Amsa has done what it can in these results and all praise to them. But with local demand for fabrication steel unlikely to improve, a sustainable turnaround will be difficult to achieve.
Chris Gilmour is an investment analyst

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