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Johannesburg - Investors in ArcelorMittal [JSE:ACL] will have to bide their time before an uptick in the economy trickles through to the steel producer's results.
According to Cadiz African Harvest fund manager Kurt Benn, the steel industry is still in a tough place at the moment. "Physical demand is low, as economic activity is still depressed."
Benn expects a recovery in demand in the latter part of 2010. "We can already see it picking up, but with the rand strong and stock levels high, it's rather depressing for steel prices. Globally things are picking up, but steel prices aren't yet at levels that will make profit for companies," he said.
Imara SP Reid analyst Stephen Meintjes explained in a note that the strengthening of the rand, the drop in international steel prices and depressed demand resulted in a severe margin squeeze for ArcelorMittal. He said exports into sub-Saharan Africa would also have lower margins to make provision for the rand.
In a third-quarter results update to shareholders in late 2009, ArcelorMittal said its South African exports increased by 17% from the second quarter to 402 000 tonnes in the third.
It also said its fourth-quarter results of 2009 were expected to improve further, driven by higher sales and lower costs, with a drop in coal prices making the largest contribution. But the rand's performance was a critical variable in our outlook for the quarter, it said.
Housing market may boost profits
On Friday afternoon, the rand was bid at 7.56 to the dollar. According to I-Net Bridge, the average rand/dollar exchange rate for the period November 28 2008 to January 1 2009 was 9.95.
"The recovery in the global economy should continue to boost worldwide demand for steel. Steel price improvements will depend on the discipline steel producers exercise in aligning production with demand."
But analysts said steel industries aren't improving as quickly as other commodity markets, which have been showing massive rises as economies improve. This is because a lagged effect means a solid growth rate is needed to improve demand.
According to ArcelorMittal, domestic demand is set to recover further during the fourth quarter on the back of the stronger international economy and a slight easing of credit requirements by the banking sector. However, the seasonal slowdown in domestic activities during the December holiday season will have an influence on the sales volumes," it said.
Benn said when the housing market in SA improves, steel companies' profits will improve further as a large portion of the housing market uses steel for rebar and roofing. He also said construction activity picks up in tandem with steel demand.
A consensus of brokers on McGregor BFA shows a slight increase in annual earnings per share to 2 128c at end-December 2009 from 2 105c the year before, and almost a doubling in dividends per share to 707c from 365c declared in 2008.
ArcelorMittal shares were trading at R105.44 on Friday afternoon, down 1% from Thursday's close. The decline was in line with the 1.16% in the JSE's broader All-share index.
- Fin24.com
