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Johannesburg - ArcelorMittal SA [JSE:ACL] slid into a full-year loss on the back of higher raw material costs, lower output and weaker sales and warned that a pick-up in demand from key construction industry customers has yet to materialise.
Chief Executive Nonkululeko Nyembezi-Heita said restocking and lower input prices would bring a significant turnaround in earnings for the first three months of 2012 compared with the previous quarter but the outlook was challenging.
“The primary consumer of steel products in South Africa is the construction industry and the outlook from this particular sector continues to be bleak,” Nyembezi-Heita said.
“Therefore it is difficult for us to gauge when underlying demand for steel will really start kicking in.”
The South African unit of ArcelorMittal, the world’s biggest steelmaker, is betting on planned projects to build renewable power plants, transport infrastructure and water systems in the country to boost but it is unclear how quickly these projects will come on stream.
Production last year was hit by structural problems, including a furnace failure at its Newcastle plant, a strike in the steel sector and a shutdown at its Saldanha Works operation. The Newcastle plant has since resumed full output.
Shares in the company fell 1.97% to R66.27, compared with a 0.42% fall in the JSE Top-40 blue chip index.
“We are fairly positive about the steel industry globally and steel demand in this country, but there are many challenges to Arcelor, particularly its iron ore supply and operational difficulties,” said Paul Theron, an analyst at Vestact.
Globally, steel makers are expected to report a weak fourth quarter on destocking and squeezed margins, but parent ArcelorMittal forecast an improvement in the first half of 2012 from a weak end to last year.
Iron ore supply
A major issue facing the South African unit is the outcome of an ongoing dispute over iron ore prices with Kumba Iron Ore , a unit of Anglo American.
The two firms have been at loggerheads over prices since early 2010 after a preferential deal lapsed, and an arbitration hearing will decide if the steelmaker can keep sourcing iron ore from Kumba at a discount.
ArcelorMittal said it was confident the arbitration hearing would rule in its favour, although it may take until next year to resolve the dispute. The company had paid R1.1bn more for iron ore in 2011 due to the dispute.
Africa’s largest steelmaker reported a diluted 2011 headline loss per share of 13 cents, compared with headline EPS of 343 cents in 2010. Headline EPS is the main profit gauge in South Africa and strips out certain one-time items.
“We had to contend with unrelenting pressure on operating margins as production costs climbed 19% while steel prices only rose 12% on average,” Nyembezi-Heita said.
The company, which sells 90% of its steel in Africa, said sales fell 7% to 4.7 million tonnes during 2011, while revenue was up 4% to R31.5bn.
The company forecast a capital expenditure of around R1bn for 2012.
To mitigate the impact from further cost hikes, the firm plans to buy prospecting mineral rights for an iron ore source in the Northern Cape province and is awaiting government approval to do so.
The unit is also investing heavily in electricity projects, hoping to reduce its reliance on power utility Eskom and steep increases in power tariffs expected for the next few years.
Chief Executive Nonkululeko Nyembezi-Heita said restocking and lower input prices would bring a significant turnaround in earnings for the first three months of 2012 compared with the previous quarter but the outlook was challenging.
“The primary consumer of steel products in South Africa is the construction industry and the outlook from this particular sector continues to be bleak,” Nyembezi-Heita said.
“Therefore it is difficult for us to gauge when underlying demand for steel will really start kicking in.”
The South African unit of ArcelorMittal, the world’s biggest steelmaker, is betting on planned projects to build renewable power plants, transport infrastructure and water systems in the country to boost but it is unclear how quickly these projects will come on stream.
Production last year was hit by structural problems, including a furnace failure at its Newcastle plant, a strike in the steel sector and a shutdown at its Saldanha Works operation. The Newcastle plant has since resumed full output.
Shares in the company fell 1.97% to R66.27, compared with a 0.42% fall in the JSE Top-40 blue chip index.
“We are fairly positive about the steel industry globally and steel demand in this country, but there are many challenges to Arcelor, particularly its iron ore supply and operational difficulties,” said Paul Theron, an analyst at Vestact.
Globally, steel makers are expected to report a weak fourth quarter on destocking and squeezed margins, but parent ArcelorMittal forecast an improvement in the first half of 2012 from a weak end to last year.
Iron ore supply
A major issue facing the South African unit is the outcome of an ongoing dispute over iron ore prices with Kumba Iron Ore , a unit of Anglo American.
The two firms have been at loggerheads over prices since early 2010 after a preferential deal lapsed, and an arbitration hearing will decide if the steelmaker can keep sourcing iron ore from Kumba at a discount.
ArcelorMittal said it was confident the arbitration hearing would rule in its favour, although it may take until next year to resolve the dispute. The company had paid R1.1bn more for iron ore in 2011 due to the dispute.
Africa’s largest steelmaker reported a diluted 2011 headline loss per share of 13 cents, compared with headline EPS of 343 cents in 2010. Headline EPS is the main profit gauge in South Africa and strips out certain one-time items.
“We had to contend with unrelenting pressure on operating margins as production costs climbed 19% while steel prices only rose 12% on average,” Nyembezi-Heita said.
The company, which sells 90% of its steel in Africa, said sales fell 7% to 4.7 million tonnes during 2011, while revenue was up 4% to R31.5bn.
The company forecast a capital expenditure of around R1bn for 2012.
To mitigate the impact from further cost hikes, the firm plans to buy prospecting mineral rights for an iron ore source in the Northern Cape province and is awaiting government approval to do so.
The unit is also investing heavily in electricity projects, hoping to reduce its reliance on power utility Eskom and steep increases in power tariffs expected for the next few years.
