Founder: Turnaround Talk
South African economic growth in the years that followed the release of Nelson Mandela (in 1990) and the first democratic elections in 1994 was driven by a significant infrastructure build programme. This growth was replicated in 2008 when work began on another massive infrastructure build programme to prepare the country for the 2010 FIFA World Cup. Finally, China’s ambitious infrastructure build programme continued this growth well into 2015.
During this time, Iscor – which was later purchased by LNM Holdings N.V. and became ArcelorMittal South Africa – became one of the driving forces of the economy as it was a key supplier of metal for the South African and Chinese programmes. Even during the 2008 Global Financial Crisis, South Africa was buffered from the most significant impacts of the global downturn.
Unfortunately, it is a case of how the mighty have fallen. Loadshedding and muted global demand have impacted the company significantly. Recent reports suggest that the company underestimated the disruption that it faced.
Volatile trading
The article points out that Shares in ArcelorMittal crashed by 43% on Tuesday afternoon (18 July 2023), wiping out about R1.7 billion in shareholder value. This was after it announced it had swung into an interim loss after underestimating the economic effects of unprecedented load shedding on its customers.
The group said in a trading update it expects headline earnings per share to fall as much as 117% in its year to end June, implying a loss of as much as about R515 million for a company now valued at about R2.3 billion on the JSE.
Underestimated disruptions
The group said the “softness of the market amidst the unprecedented 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”.
“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,” it added.
The News24 article points out that the company, which dates back to 1928 and accounts for more than half of SA’s crude steel production, had reported that load shedding, rail dysfunction, and strikes shaved off R2.3 billion in earnings in its year to end-December, but had been optimistic that conditions were improving.
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Price-cost pressures
The article points out that Unsustainable price-cost pressures and positive movements in early 2023’s international steel prices, offered reasons for some optimism, it said on Tuesday, however, “locally the trading environment caught no such tailwinds”.
High inflation, load shedding, rising interest rates and a contraction in key steel consuming sectors such as manufacturing, autos as well as mining and construction affected already fragile consumer confidence, the group said in its update.
The article adds that, furthermore, the anticipated release of working capital proved to be much more difficult, resulting in the net borrowings position remaining at elevated levels, it added.
Key resignation
The article points out that ArcelorMittal, which had net debt of about R2.8 billion at the end of December, had also announced on Monday that CFO Siphamandla Mthethwa had resigned for personal reasons after just over two weeks in the job.
“Remedial actions are under way to improve the company’s net borrowing position in the wake of the weaker-for-longer steel trading environment in the region,” the group said on Tuesday.
Shares in ArcelorMittal SA crashed almost 43% to levels last seen in early 2021, and they have now just over halved so far in 2023.
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An unclear future lies ahead
What does the future hold for one of South Africa’s biggest, most profitable companies?
Even if the South African Government got all of their ducks in a row and had a workable plan for addressing the Energy Crisis – which is doesn’t – it will take at least 12 to 15 years to get the country to a situation where loadshedding can be completely scrapped. While we may face lower load-shedding levels during this plan’s roll-out, the energy-intensive nature of the steel-making process will still significantly impact the company.
There will also be disruption in the form of a global commitment for countries to reduce their carbon footprint. Infrastructure projects will be scaled back, reducing demand for Arcelor’s main product.
ArcelorMittal South Africa is now playing a high-stakes game of improvising, adapting, and overcoming to increase profitability. Has the company invested enough capital in research and development to develop a renewable energy source to maintain its production levels? Has the company invested enough capital in research and development to develop a product that can be rolled out alongside steel to compensate for reduced demand? Finally, has the company done the requisite investigation to branch into business areas with significant demand?
