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ArcelorMittal has warned the government that South Africa’s industrial future was being threatened by escalating power prices and an unreliable transport infrastructure.
The country’s largest steel maker delivered the warning as it reported it had begun a sixth year of losses, with the headline loss for the six months to June more than quadrupling to R458 million from a year ago as energy costs rose and sales gained just 3% to R17 billion. New CEO Wim de Klerk said the company expected a better second half, but declined to say if that would mean a return to profit.
Chief financial officer Dean Subramanian told City Press Transnet only managed to supply an average of 13 trains when the company had budgeted for 21. Resorting to road transport would have cost R350 million, making it unviable. And with Eskom raising energy tariffs by 9.6% and asking for double-digit increases in the next five years, ArcelorMittal and the whole South African industrial complex would struggle to survive,
he said.
“It’s going to make our business unsustainable,” he said. “Our focus in future is going to be more strategic . . . working on the Transnet and Eskom relationship.”
To mitigate the effect of rising power costs, ArcelorMittal is embarking on small-scale initiatives like installing a high-pressure boiler, which will add 15 megawatts, and bigger gas holders, but the bulk of power remained with Eskom, exposing the firm to higher costs.
Independent analyst Mark Ingham said management had produced “quality earnings” in a difficult environment.
While recent duties against Chinese imports would help, the government needed to recognise the key role of steel in the economy.
“We need to recognise that steel is fundamentally important to the industrial fabric of South Africa,” he said in an interview after the results presentation. “It’s vital to protect Arcelor from an efficiency point of view. Their cost of electricity is up more than fourfold since 2006 to 2007. It can’t continue.”
The earnings were boosted by increased market share, boosted by a drop in imports and the collapse of Evraz Highveld. In the flat-steel market, it rose to 72% from 59%, while in the long-steel segment, it jumped to 64%, with capacity utilisation advancing to 83% from 75%. Chinese imports into South Africa declined by 29%.
De Klerk said the company was negotiating with the Industrial Development Corporation (IDC) and the business-rescue practitioner of Evraz Highveld to supply some materials that would help reopen its heavy-section mill for a year. While the IDC has supported this, De Klerk wouldn’t say if this could lead to an equity takeover.
In the second half of the year, ArcelorMittal planned to spend R1 billion on capital expenditure, adding to the R900 million spent in the first half. In the next five years, the company planned to spend about R10 billion on maintenance and expansion projects, Subramanian said. Capacity would be ramped up to between 88% and 90%, he said.
The company was also strengthening its balance sheet, starting with a syndication process with banks to reduce reliance on overnight facilities. In the medium term, the company would also consider selling bonds, he said.
