Estimated reading time: 10 minutes
ArcelorMittal South Africa (AMSA), a significant influencer on the local economy and job market, discusses their reality when looking at the challenges faced in South Africa, such as the recent civil unrest, pandemic and the fluctuating steel market.
On Thursday, 29 July 2021, the steel giant opened up and discussed its interim results for the first half of the year and its current situation.
The following are some of the key points made by AMSA:
- Half-year EBITDA of R3 218 million strongest in a decade
- 79% increase in average international dollar steel prices, with a 42% increase in realised rand prices
- 10% increase in sales volumes and 36% increase in liquid steel production
- Raw material basket (RMB) increase limited to 2% against a 44% increase in the international RMB (rand terms)
- Business Transformation Programme savings of R1 001 million
- Free cash flow of R985 million resulting in a net debt of R2 782 million
- Headline profit of R2 482 million (H1 2020: R2 613 million loss)
Kobus Verster, CEO, ArcelorMittal South Africa, says, “The strong half-year results reflect the benefits of ArcelorMittal South Africa’s new operating model, and improvements made to our structural cost position, notably regarding strategic raw materials and fixed costs.”
Furthermore, ArcelorMittal South Africa enjoyed a solid start to 2021, recording a half-yearly EBITDA of R3 218 million (against a loss of R1 256 million in the previous period), its strongest in a decade thanks to more substantial sales volumes and the benefit of robust price-cost effects as a result of higher steel prices against raw material costs.
The company’s operating profit increased from a loss of R1 528 million in H1 2020 to a profit of R2 945 million, while headline profit of R2 482 million recovered from a loss of R2 613 million, amounting to a 223 cents per share profit against 239 cents loss for the comparative period in 2020.
Verster adds, “This performance was remarkably achieved against the backdrop of one of the most challenging operating environments in our company’s long history.”
The challenges in the first half of the year included two Covid-19 waves, ramp-up challenges associated with restoring and accelerating production in the complex integrated steelmaking environment, an extended maintenance stop at Newcastle’s blast furnace to address damage caused by the hard lockdown, a highly inconsistent rail service which led to frequent and costly operational stops, and tragic safety incidents.
The recovery in the global steel environment since the second half of 2020, accelerated in 2021. Activity levels in steel markets have continued to recover. Strong demand and low supply chain inventories (following significant destocking in previous periods) have supported a recovery in steel spreads (the difference between steel prices and raw material costs).
Market inventory levels are increasing, albeit at varying speeds for different products. By the end of June 2021, ArcelorMittal South Africa’s monthly production levels and dispatches were largely balanced.
Limitations in credit insurance available to the steel industry currently are presenting serious challenges to the industry. ArcelorMittal South Africa is working closely with customers to manage supply, given that many customers do not have the necessary credit cover lines to fund back-orders.
Global crude steel production increased to 1,0 billion tonnes by 30 June 2021 as economic stimulus packages continued to benefit the mining, manufacturing and infrastructural sectors, while supply chains remained under pressure.
The company’s average capacity utilisation excluding Saldanha Works increased to 59% (39% H1 2020) and is currently at 85%. Liquid steel production increased by 36% or 403 000 tonnes, from 1,1 million tonnes to 1,5 million tonnes in H1 2021.
Total sales volumes increased by 10% or 116 000 tonnes to 1,3 million tonnes for the company, due to a 21% rise in domestic sales and a 39% fall in seaborne exports, as volumes were reallocated to Africa Overland markets.
The tragic safety incident at the company’s Vanderbijlpark coke-making operation was the main reason for lower commercial coke production. Although commercial coke production was 22% lower at 91 000 tonnes, supplemented with available inventory, sales volumes were 61% higher at 193 000 tonnes.
Apparent steel consumption (ASC) in South Africa for the first half of 2021 increased by 9% to 2,2 million tonnes compared to the preceding six months (H2 2020).
Total steel imports of primarily hot rolled coil, galvanised sheet and tinplate increased by 25% to 687 000 tonnes compared to the preceding six months (H2 2020) because of supply chain shortages in the local market. This is 31% of South Africa’s ASC (H1 2020: 24%), which is expected to reduce as the supply chain normalises due to recovering domestic output, the cancellation of steel export incentives by China, and the imposition of import duties by Russia.
Although the European Union is extending the current safeguard measure on imports of certain steel products for three years, and the US Section 232 measures remain in force, disappointingly, South Africa’s safeguard duties are set to lapse in August 2021.
The company’s overall realised steel price increased by 57% in dollars and 42% in rand terms, as the average dollar/rand exchange rates strengthened by 13%. Average international dollar steel prices increased by 79%. This contrasts to iron ore indices which increased by 101%.
The company’s raw material basket (iron ore, coking coal, and scrap), representing 43% of total cash cost, was 2% higher in rand terms, which is pleasing given the 44% increase in the international raw material basket. This reflects the work done in diversifying the sources of raw materials. Electricity tariffs increased by 12% for the company.
ArcelorMittal South Africa’s Business Transformation Programme (BTP) contributed a further R1 001 million (H1 2020: R663 million) in savings, adding to R3,6 billion of improvements achieved since the programme started in the second half of 2018. With South Africa deep in the third wave, ArcelorMittal South Africa continues to be vigilant in efforts against the virus, ensuring its employees protect themselves, strictly implementing the latest guidelines and ensuring its workforce is enabled to follow strict hygiene and social distancing standards at work.
ArcelorMittal South Africa board, management and employees were saddened by the four fatalities in the first six months of 2021. An investigation into the safety incident at Vanderbijlpark on 17 February 2021, in which three ArcelorMittal South Africa employees were tragically killed, is being led by an external independent party and includes representatives from labour. Once finalised, an investigation report will be issued.
Verster said, “With the assistance of the ArcelorMittal group, we have reviewed, refocused, and reinvigorated our efforts to eradicate accidents and fatalities across the business.”
One of the priorities of the ArcelorMittal group is to lead the steel industry globally on sustainability. This is reflected in the XCarb™ brand, which brings together all ArcelorMittal’s reduced, low and zero-carbon products and steelmaking activities and broader initiatives and green innovation projects into a single effort focused on achieving demonstrable progress towards carbon-neutral steel and the net-zero commitment by 2050.
Leveraging the relationship with its parent company, ArcelorMittal South Africa is exploring, in collaboration with various large industrial partners, research organisations, and business initiatives, opportunities relating to carbon capture and storage (CCS), blue and green hydrogen applications indirectly reduced iron (DRI) production, and improved energy efficiency initiatives.
Saldanha Works has been identified in a study by the SA-EU Partnership and the CSIR as being ideally suited for green DRI production. The company’s integrated steelmaking sites are prime candidates for CCS technology. ArcelorMittal South Africa will finalise its implementation roadmap for meaningful carbon reduction by the end of 2022.
In South Africa, the company will need funding support for carbon neutrality initiatives along with an enabling environment to encourage cross-sector and industry collaboration.
ArcelorMittal South Africa is a proud signatory of the Steel Industry Masterplan and has committed senior resources to this ambitious but critically important initiative. Together with the Infrastructure Investment Programme (IIP) and the African Continental Free Trade Area (AfCFTA) agreement, the plan presents real opportunities for the steel industry to start growing again. ArcelorMittal South Africa is ready eager to contribute.
Looking to H2 2021, stronger GDP growth forecasts for South Africa for 2021 are positive for steel demand. Unless there is damage to overall business sentiment in South Africa due to further economic lockdowns for Covid-19, ArcelorMittal South Africa expects the impact of a healthier market and operating environment to be more fully reflected in the company’s performance in the second half of the year.
However, during these times, which typically see higher activity levels and additional restoration costs being incurred, the focus on structural cost competitiveness will remain critical.
Looking at Newcastle, the unrest earlier in July affected major highways, and transport routes with roads being blocked, widespread vandalism and vehicles, especially transport companies, being petrol bombed and stoned. The KwaZulu-Natal rail corridor to and from Newcastle was also affected, with flows coming to a halt.
As a result, transporting material into and out of ArcelorMittal South Africa plants and dispatches by road was disrupted. Also, several customers closed their premises to ensure the safety of people and property.
Consequently, ArcelorMittal South Africa’s ability to fulfil its contractual/delivery obligations was affected by factors beyond the company’s reasonable control, which constitutes a Force Majeure event and, as such, ArcelorMittal South Africa gave notice of Force Majeure to its customers.
Once the unrest had satisfactorily subsided, the company lifted the Force Majeure on 20 July.
The impact was mainly on-road logistics, which resulted in an increase in the stock on the floor ready for customers. The company has made all efforts to minimise the impact on customers and catch up on dispatches impacted during the riots. “We did, however, slow down on our primary production at both Newcastle and Vanderbijlpark to protect our assets from possible raw material outages. This caused a permanent production loss of around 15kt.”
Shipments that were permanently lost: 20-25kt. (10kt Long, 10kt Flat local, another 5kt Flat AOL) – Financial impact ca. R150m
In regards to the current situation, Newcastle Works is not showing any signs of weakness, as according to ArcelorMittal, the increased demand in the local and Africa Overland markets has allowed Newcastle Works to increase its production levels to above 80% levels.
ArcelorMittal adds, “The good maintenance work done on the Newcastle blast furnace in March has ensured that the furnace is producing iron at very stable production levels and this has also had a positive impact on the other downstream processes. The improved production has made it possible for the Newcastle Works to start catching up on customer demand and to service the local and Africa Overland markets. Meeting customer requirements is very important to us and we have been working closely with them to ensure we prioritise the correct orders and ensure on time delivery. Our customers have also been supportive during this time.”
Moreover, ArcelorMittal Newcastle is determined to create a new culture within its ranks. “Safety of our employees is our number one priority and we have embarked on a journey of changing our culture to improve our safety and health performance. We are fully committed to our goal of zero harm, ensuring every employee goes home safely every day.”
The relentless drive of each and every employee to reduce costs, optimise efficiencies and increase production levels has made it possible to be competitive. “We are currently busy with projects to develop new products, continually improving customer relationships and working on our maintenance strategies to ensure efficient operations for the longer term.”
Concluding, ArcelorMittal Newcastle states, “The safety and health of our employees, contractors and local communities is our top priority. Covid-19 remains a serious risk and many have lost loved ones to the virus. We must ensure that we comply with the Covid-19 prevention protocols to lower infection rates, and we get vaccinated as soon as we can. We can beat this virus if we work together. Vaccination is the world’s best chance to defeat Covid-19, save lives and help our economy to recover. If you’re vaccinated, you’re better protected from serious illness or death, and you reduce the risk of your family and other loved ones contracting the coronavirus.”
In addition, ArcelorMittal South Africa affirms it remains committed to Newcastle Works and will continue to make a positive contribution to the community.
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Image credit: arcelormittal.com