Africa’s largest steel producer ArcelorMittal South Africa reported its first quarterly loss since the unbundling of the steel and mining units of Iscor in 2001, declaring a headline loss of R237-million for the first quarter of 2009 on Wednesday. The result was also a massive reversal of the R2-billion profit reported by the group during the corresponding period in 2008.

The most recent previous loss by the steel unit of Iscor was the R66-million interim loss made in the six months ended June 2001.

CEO Nku Nyembezi-Heita said that the loss arose from a "sudden and sharp" collapse in the international demand and prices for steel.

Realised steel prices were, on average, 50% below those reported as recently as six months ago, the group said in a statement, adding that there were few signs of an improvement in global steel demand and prices.

Costs had also remained high, owing primarily to the fact that coking coal supply contracts were concluded at high prices in 2008 and would only lapse during the second quarter.

Liquid steel production for the first quarter was 26% lower than output in the first quarter of 2008, but 38% up when compared with the fourth quarter.

“Production levels last year fell from around 80% of capacity to below 50% in the fourth quarter as we aligned the supply of steel to reduced demand levels.

“Production has picked up to levels of around 60% of capacity in the first quarter of this year as the loss in sales on the domestic market was shifted to financially viable export orders,” the company said.

CAPACITY USE MIGHT RISE TO 65% IN Q2
But Nyembezi-Heita expected capacity utilisation to climb to about 65% in the second quarter. Production would be aligned to areas of demand, with the group noting that it had some flexibility to swing between product types and grades, as well as to adjust its production mix from its blast furnaces at Vanderbijlpark to its electric-arc furnaces.

Total steel sales of slightly more than one-million tons were achieved in the period, which were down from the 1,4-million tons sold in the corresponding period of 2008, but up on the 915 000 t sold in the fourth quarter.

Nyembezi-Heita said that the results for the second quarter were expected to improve marginally as the cost of raw materials, particularly coking coal, began to reflect new market realities. She would not be drawn on where the group anticipated coking-coal prices would settle. But she said that the recent price settlement in China, where prices declined 60% to $128/t, was a “good guide”.

An analyst, who requested not to be named, said that he was not surprised by the poor earnings performance, given prevailing market conditions. He indicated that he was expecting earnings for the full year to fall by about 65%, with a market recovery only likely in the second half.

Another analyst, said that she was factoring in an average hot-rolled coil price of $465/t for the year, and that the real pick-up in demand and prices could only be anticipated in 2010.

The analyst was also cautious about the prospect of South Africa’s infrastructure expenditure being able to take up the demand slack left by the country’s struggling manufacturing sector.

Unlike its parent, which hinted on Wednesday to a possible price recovery in the second and third quarters, the South African business said prices for steel products in the region were expected to remain weak.

CAUTIOUS ON PRICING
Nyembezi-Heita did not comment on whether prices would fall again next month, saying only that the decision would be made by the end of business on Wednesday and that the exchange rate, which had strengthened materially, was the key factor.

The group cut prices by between 5% and 8% as from the beginning of April, translating into a near halving of prices since their peak back in August 2008.

The April cut followed on from two months of price rollovers, and appeared to have been precipitated by the recent strengthening in the rand and continued steel price weakness elsewhere in the world.

Given the renewed rand-versus-dollar vigour in recent weeks, a price cut was, therefore, quite likely for May as well.

The group expected domestic sales volumes to increase slightly during the second quarter as the destocking process neared its end. Stock levels were estimated at ten weeks and ArcelorMittal South Africa saw those “normalising” to around eight weeks by the end of the current quarter.

“A decline in inflation, further likely interest rate cuts and government’s commitment to continue with its infrastructure programme, should also improve consumer and investment spending as the year progresses,” Nyembezi-Heita said, adding that there were signs that steel demand arising from the country's R787-billion infrastructure programme was beginning to show through.

Steel demand had been particularly strong from power utility Eskom, which was currently building two new coal-fired power stations, with a combined price tag of more than R200-billion.Demand from the Medupi power station site, in Limpopo, had picked up strongly and was expected to rise further in the second quarter, and ArcelorMittal South Africa anticipated that steel demand from the Kusile, in Mpumalanga, would pick up by the end of the year.

African demand was also beginning to recover after the slump of the fourth quarter and the group reported that 70% of its exports in the first quarter had been directed into the region.

It added that demand from infrastructure programmes in Angola, Kenya and Tanzania was recovering and should “normalise” in the second quarter.

The group was also continually reviewing its production strategy and mix, but said that there had not been a market difference in the fall off in demand between long and flat products.

However, it added that the outlook for long products was probably superior, owing to the continued infrastructure spend and the slump in demand from the manufacturing sector, particularly the struggling automotive industry.

Somewhat surprisingly, the group also elected to announce that it would return some of its R5-billion in cash through a share repurchase programme for about 10% of its shares in issue.

The buyback would be based on the five-day volume weighted average traded price of R87,64/share at the close of business on April 20, and could involve 44,6-million shares valued at R3,9-billion.

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