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Can ArcelorMittal continue to produce record profits?

by centra

By Thys Khiba  – South Africa’s steel producer shareholders have questioned whether ArcelorMittal SA under the leadership of CEO Kobus Verster can sustain profitability. 

This is after they [ArcelorMittal SA] have faced an existential crisis in 2020. Questions by investors came after the share had fallen to 9c, with the market valuing the business at a paltry R100-odd-million, and liabilities almost exceeded assets. Debt of R3.6-billion was rising fast.

In 2018, Verster initiated the business transformation process (BTP), which before Covid-19 took its toll on the global economy and nearly broke AMSA – aims to cut costs, improve operational reliability and plant utilization.

In January 2022, South Africa’s only upstream steelmaker, ArcelorMittal (AMSA). The share has rebounded by an impressive 626% over the past year – 22% over the past month and 14.4% in the past week – making shareholders very happy. 

“Recent global and domestic steel demand has been strong and has helped lift prices, which has been good for AMSA’s performance,” said SGB Security mining and commodities analyst, Thabang Thlaku. 

Investors are expecting final to be released in the second week of February to reflect the same positive momentum which is reflected in the interim results that were published in September. 

But more pressure on the AMSA and good news to investors as the current strong share price is likely to continue. 

AMSA indicated earnings before interest, tax and other accounting treatments of R3.2-billion, its strongest half-year ebitda in a decade. The 2020 debt of R3.6-billion was now reduced to R2.7 billion. 

Meanwhile, free cash flow improved by a positive R985-million this year compared to a negative R306-million of a year previously.

AMSA results were supported and kept afloat by two factors, which are a significant rise in global steel prices and a faster-than-expected resurgence in demand from the mining, automotive, manufacturing, construction and energy sectors. 

Average international dollar steel price went up by 79% in the period, SA’s steel producer realized a 42% increase in rand steel prices. They [AMSA] have also managed to keep cost increases in its raw basket (largely iron ore, coking coal and scrap metal) down to 2%. 

Since the initiation of the BTP by Verster, R3.6-billion worth of costs have been removed, with a billion coming in the past year – largely through retrenchments and the mothballing of Saldanha Steel. 

In an industry as volatile as this, costs are a big deal for steel producer, and productivity and profitability are more important than growing revenue. But at ArcelorMittal SA, fixed costs -salaries and operating costs – account for just 26% of its input costs and are the only costs over which it has some control. 

“A lot of work has gone into cutting costs and streamlining, but at the end of the day, AMSA is a high-cost producer which has limited control over its input costs. This means that, to some extent, it will always be a leveraged to the steel cycle,” said Sanlam Investments equity analyst, Derick Deale.

The balance – raw materials (43%) and consumables and auxiliaries, including electricity, (31%) – is outside its control.

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