JSE-listed steel producer ArcelorMittal South Africa (Mittal), which declared force majeure in February after a fire at its Vanderbijlpark facility, said on Friday that it expected to turn around its first quarter loss and report “positive earnings” in the second quarter.

CEO Nonkululeko Nyembezi-Heita said the financial turnaround would be underpinned by stable market demand, a recovery in production to normalised levels and higher sales volumes.

No insurance proceeds were expected to flow until the third or fourth quarter of 2013, with CFO Matthias Wellhausen estimating the earnings impact at $77-million and the property damage at around $20-million.

There would be no reimbursement for the first $45-million in losses, while an income-statement effect would only be derived from claims above the $75-million threshold.

While international steel prices were expected to remain subdued, rand/US dollar exchange rate movements would have a bearing on the company’s second-quarter earnings.

Mittal reported a headline loss of R270-million for the quarter ended March 31, 2013, which was an imporvement on the headline loss of R456-million in the last quarter of 2012, but well below the earnings of R283-million recorded in the corresponding period last year.

Nyembezi-Heita said repairs had been completed at the Vanderbijlpark plant, with the three basic oxygen furnaces having been recommissioned and full operations resuming during the second week of April.

But the two-month stoppage had resulted in a 26% period-on-period fall in overall liquid steel production to 355 000 t, while capacity utilisation for Mittal’s flat-steel facilities contracted to 54% from 69% in the corresponding period during 2012 and 61% in the preceding quarter.

Mittal estimated that 361 000 t of liquid steel production was lost as a result of the incident, which it attributed to a combination of an unforeseen failure of the sensor and software, which caused uncontrolled tilting of the convertor and the spilling molten steel. This led to a fire in the cable tunnels, which spread to the control room, destroying the converter control systems, all cables, the operator stations, the motor control centre and associated equipment for all three furnaces.

“Our operational teams exceeded all expectations in bringing the steel plant back into full operation ahead of schedule, enabling us to resume production several weeks before the anticipated dates. We are now working through the backlog and yesterday announced the lifting of the force majeure,” Nyembezi-Heita reported.

By contrast, capacity utilisation from its long-steel units, primarily based in Newcastle, in KwaZulu-Natal, was 81%, which was better than the 70% reported in the prior corresponding period.

Revenue declined 15% year-on-year to R7.8-billion, owing to a 16% drop in total steel shipments, with a 12% fall in domestic shipments and 28% fall in exports. However, quarter-on-quarter revenue climbed 13%, which Mittal attributed to a 10% increase in steel shipments.

Average net realised prices were 4% higher quarter-on-quarter with local prices rising 2% and exports 7%. Prices for flat and long steel were up 5% and 2% respectively.

TAXING ISSUE

The group was still studying the possible implications of the introduction of a carbon tax in South Africa from January 2015.

However, Nyembezi-Heita confirmed that it would have a significant impact on the production cost of steel and that the worst-case scenario would be a R600-million yearly impact, based on the company meeting a 70% tax-free threshold.

However, it would continue to study the possibility of meeting the requirements for the 80% threshold level and would also interrogate whether it would qualify for the offsets outlined in the latest discussion paper, released by the National Treasury in early May.

The paper proposed that a carbon tax be introduced at R120/t carbon-dioxide equivalent above the tax-free thresholds and that the tax rate be increased at a rate of 10% a year until December 31, 2019.

Wellhausen indicated that Mittal should have a better handle on the issue by the time it reported its interim results in August, while Nyembezi-Heita revealed that the company had “made peace” with the fact that some form of carbon tax would be introduced.

She said the tax, along with fast-rising electricity prices, would also add impetus to its own-generation projects, with the focus now turning from its Saldanha plant, in the Western Cape, to its largest facility, at Vanderbijlpark, in Gauteng.