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Johannesburg - Only a recovery in fundamental industrial demand would stimulate the steel market, said Shoaib Vayej, a portfolio manager for Sanlam Investment Management (SIM).
Vayej was commenting on a decision by steel maker ArcelorMittal SA earlier this week to cut all steel prices by between 5% and 8%.
ArcelorMittal SA was likely to shift a greater proportion of its product to the offshore market, he said. At present about 90% of ArcelorMittal's output is consumed in South Africa.
Lower steel prices would hurt earnings: "It definitely will have an impact on their (steel manufacturers') profitability," said Vayej in an interview.
Compounding lower steel prices, the rand was tipped to strengthen in April which would mean lower revenues in rand terms for the steel ArcelorMittal SA exported.
"Since October, prices have come down by 45% on most of our products, from the highs we had in September," said ArcelorMittal spokesperson Sven Lünsche in an interview with Reuters.
In another recent development, India said it would impose tariffs on South African steel. Lünsche said this was not in keeping with ArcelorMittal's preference for "free markets".
ArcelorMittal SA is in a closed period at the moment and could not comment on the impact of steel price decreases on its revenue and earnings per share. Full disclosure would come towards the end of April, when it releases its results.
Mining sector relief
The news of lower steel prices will come as good news to South Africa's mining firms, which in 2006 successfully took ArcelorMittal to the Competition Tribunal for high steel prices.
Marian van der Walt, Harmony Gold's executive for corporate and investor relations, said the decrease in steel prices would reflect as a saving on its balance sheet.
Production cutbacks initiated by the lack of global demand for steel has left the industry holding onto more stock than it would prefer. By the end of December, ArcelorMittal had one million tons of steel stockpiled, equivalent to 12 weeks of shipments.
Arcelor Mittal SA produces about eight million tonnes of liquid steel per year. The company has a market capitalisation of R29.41bn.
In its annual report, ArcelorMittal said by mid-October the group had had production cutbacks of over 30% worldwide.
Although companies like ArcelorMittal and Highveld, another steel manufacturer, have been knocked by the lack of demand for steel products, producers of iron ore like BHP Billiton have also seen a drop in demand, especially from China.