ARCELORMITTAL SOUTH AFRICA – RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2015

Mr Paul O’ Flaherty, CEO of ArcelorMittal SA. Photo: A. Douwenga, Mardo Photos
Mr Paul O’ Flaherty, CEO of ArcelorMittal SA. Photo: A. Douwenga, Mardo Photos

Johannesburg, South Africa, 31 July 2015: Lower sales volumes have resulted in ArcelorMittal South Africa reporting a headline loss of R109 million for the six months ended 30 June 2015, compared to a loss of R6 million for the same period ended 30 June 2014.  The Company’s EBITDA was R715 million, which is a decrease of R95 million against the comparative period.

 

Despite various challenges, steel production increased to 2.6 million tonnes, 177 000 tonnes higher than the comparative period. The increase is as a result of a higher production output following the furnace reline at Newcastle, as well as enhanced operating efficiencies at various plants.  Overall capacity utilisation improved from 74% to 80%.

 

The constrained steel market has resulted in total sales volumes being down by 7% (163 000 tonnes) to 2 million tonnes, against the comparative period.  This was essentially driven by a 29% decrease in export sales, but was offset to some degree by a 2% increase in domestic sales.

 

 

 

While safety is the company’s number one priority and the quest to achieve zero fatalities and injuries remains a key business objective, we regrettably suffered a fatal incident on 29 June 2015. ArcelorMittal South Africa will continue in its efforts to ensure the safety of all employees and contractors and to build a zero harm culture.

 

The South African economy, and in particular the manufacturing sector, continues to decline while the domestic steel market has been affected by rising cheap imports and high operational costs. The difficult operating environment can be attributed to extremely weak local demand, rising labour and energy costs coupled with electricity supply disruptions.

 

CEO, Paul O’Flaherty, commented: “There is an urgent need for government policy to support South African steel producers.  Locally, the economy is virtually at a standstill due to electricity supply constraints, infrastructure development delays and the low spending in the mining sector.”

 

In the context of these market conditions, billet production from the Vereeniging facility has become unsustainable. To best optimise its long steel business, the company is considering moving all billet production to the newly relined and more efficient Newcastle furnace, which was recently commissioned following the R1.8 billion upgrade.

 

The company announced on 23 July 2015 that it would be undertaking an industrial footprint review of its Vereeniging Works, with a view to possibly mothballing some of its plants and placing others under care and maintenance. A process of extensive consultation with all stakeholders, including employees and organised labour, is underway in an effort to find viable alternatives and to mitigate the impact of the possible closure of some parts of the Vereeniging operations. This initial process is expected to be completed by the end of August 2015.

 

Although the African markets remain positive due to the drive towards infrastructure investments in specific regions such as the West and East Sub-Saharan regions, the impact on the global market is minimal.

 

Six months ended 30 June 2015 compared to six months ended 30 June 2014 (reviewed)

 

Revenue decreased 8% to R16.4 billion following a 7% decrease in sales volumes.  Export shipments were down 29% with local shipments up 2%. Flat steel shipments were down 10% and long steel by 2%.  In Rand terms, total net realised prices remained flat with domestic prices down 3% while exports were up 2%.  Revenue from the Coke and Chemicals business decreased by 3% to R990 million. The decrease was driven by lower prices, despite an overall increase in volumes. Sales volumes for commercial coke increased by 21% while prices decreased by 3%.   Tar sales volumes decreased by 11%, which was offset by price increases of 5%.

 

 

 

The plan to reduce costs and increase efficiencies is starting to realise results. Cash costs per tonne of liquid steel produced were well contained and decreased by 2% against the comparative period. Raw materials, consisting of iron ore, coal and scrap, which together account for approximately 48% of costs, decreased by 8%.  Consumables and auxiliaries, which accounted for approximately 28% of costs, increased by 6%, while fixed costs per tonne decreased by 1%, despite having benefited from a volume increase of 7% on liquid steel produced. EBITDA costs per tonne decreased by 1% with Newcastle now weighing heavier in the mix following increased utilisation and less externally sourced steel being used.

 

Liquid steel production was 177 000 tonnes, or 7%, higher with long steel production up 28% and flat steel at the same level. Capacity utilisation for long steel improved from 58% to 75% after the reline of the blast furnace in Newcastle.

 

The increase in the net borrowing position to R2.5 billion reflects the difficult trading conditions in the steel industry.

 

Notwithstanding the tough economic conditions under which the company is operating, key environmental projects remain a priority to ensure that the company remains compliant with the relevant environmental legislation. The most important project in this regard is the Newcastle zero effluent discharge project which entails the improvement of effluent treatment and the recovery thereof. This project, which was completed in 2014 at a cost of R430 million, is currently in its final stages of commissioning. The effluent recovery and treatment systems at the Vanderbijlpark Works are currently being improved at a cost of R88 million to ensure sustained compliance levels regarding certain conditions in the company’s Water Use License. This project should be completed towards the end of 2015.

 

The proposed implementation of a carbon tax by the National Treasury remains a concern as the company’s competitiveness may be affected. Very limited opportunities exist to reduce carbon emissions in the iron and steel production process and no feasible low carbon alternatives exist to produce steel from iron ore. Mr O’Flaherty added: “We still maintain that the intention of the carbon tax to change behaviour cannot be realised within the iron and steel industry.” The company will actively participate in the Department of Environmental Affairs’ Carbon Budget Setting process during the second half of 2015 to seek alignment.

 

The company’s planned capital expenditure budget for 2015 is approximately R1.3 billion, which includes spend on the numerous environmental projects, as well as investing in the assessment and implementation of renewable energy options.

 

Outlook for the next six months

 

As stakeholders are aware, management has been working very closely with Government to ensure that the South African steel industry is sustainable in the medium and long term.  The company’s view is that excess global steel capacity, low global iron ore prices and low steel prices are the new reality and the company needs to change the way it operates in this environment.

 

Import tariffs and designation of primary steel for localisation are key elements that need to be addressed by Government in the short-term to ensure the sustainability of the domestic steel industry.

 

On the company’s side, it is critical that it continues to focus on low cost efficient production.  It has made strides in this regard in the first six months of 2015, but is not there yet.

 

The company currently operates in an environment where it does not benefit from low seaborne/global iron ore prices due to its current agreement with Kumba; this needs to be addressed urgently.  Transnet’s performance has improved significantly in the six month period, but continual, virtual daily load shedding by Eskom continues to hamper the company’s performance.

 

H2 2015 will see a fundamental change in South Africa and without import tariffs and steel localisation, the steel industry and the company will need to undertake significant structural change.

 

ArcelorMittal South Africa expects international prices for steel to remain low which, together with a continued slowdown in the economy, will mean that results are likely to remain depressed.

 

Mr O’Flaherty concluded: “Our overriding objectives remain focused on cost containment, production efficiency enhancements and cash preservation during these demanding and challenging times.   As a management team, we intend to successfully conclude our discussions with various key stakeholders, including government, on legacy and long-term sustainability issues.”

  AUTHOR
Retha Fitchat
Editor

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