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Steel in the melting pot

Johannesburg – The decision by Murray & Roberts Holdings [JSE:MUR] to sell or shut its Western Cape steel operations trading as Cisco (Cape Town Iron & Steel  Works) should not come as a massive surprise to anyone mindful of the stresses in the global economy.

According to a recent Goldman Sachs report, the average operating profit per tonne of steel produced globally is expected to be a meagre $13 this year.

Although that's an important improvement on the $8/tonne operating loss of all steel produced in 2009, it's still well off operating profit margins over the previous five years, which were never lower than $83/tonne.

Steel price pressure might seem odd since other metals such as copper, aluminium and many other base metals, which feed into the same economic cycle, are thriving.

The US Federal Reserve's QE2 stimulus, which could top $800bn, may well trigger a breakout for many of the base metals.

Not steel, though. Nominal steel price increases were announced by China and Europe earlier this week, but there's no evidence in the market to suspect Goldman Sachs is incorrect in expecting another relatively subdued steel price performance for 2011.

The fact is that steel consumers continue to draw down on considerable inventories; consequently, steel prices don't reflect the underlying cost pressures, such as coal and iron ore, which is causing margin squeeze among producers.

For Cisco, there are specific local factors too - also shared by ArcelorMittal SA (Amsa) – such as the rapid rise in steel imports throughout the third quarter of the calendar year.

Amsa had put many of its consumers on allocation (limited supplies) following its iron ore pricing dispute with Anglo American's Kumba Iron Ore [JSE:KIO], transport-related strikes and even several accidents on the Sishen-Saldanha line. This meant buyers turned to the import market, fearing Amsa would not supply enough material.

But it's the rand that will be hurting Cisco - and Amsa - the most. It's much cheaper to import competitive steel nowadays, although the expectation is that Amsa's situation will have a somewhat improved fourth quarter following the 17% sales decline in the last three months under review.

Cisco has been struggling for a while. As early as 2009, the M&R subsidiary complained - amid sensational allegations that it and other steel makers were colluding on price - that it was the victim of predatory pricing by the larger inland mills.

The question is whether it can be bought, an important outcome for Western Cape regional industrial economics.

Why not, especially if a buyer could be found for Zimbabwe's enormously troubled state-owned steel maker Zisco, which today confirmed Essar Africa Holdings, an arm of India's Essar Group, as its buyer.

- Fin24

 

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