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According to a press briefing, earlier today, ArcelorMittal South Africa (AMSA) consistently demonstrates significant growth and stability. In fact, the steel giant claims that the fiscal year ended 31 December 2021 was its best in 15 years.
AMSA CEO Kobus Verster says, “A continuing strong price environment, higher sales volumes, the continued strategic repositioning of the company as well as the benefit of robust price-cost effects all contributed to an exceptionally profitable year for ArcelorMittal South Africa.”
Looking at AMSA’s annual results for the fiscal year ended 31 December 2021, Verster notes that, despite the volatility caused by Covid-19 and its variants, AMSA has recorded its highest annual EBITDA (R8.569 billion) and headline earnings of R6.86 billion since 2008.
Acting Chief Financial Officer (CFO), Suretha van Wyk added that operating profit increased substantially from a loss of R963 million in 2020, to a profit of over R7.9 billion.
The headline earnings of R6.86 billion recovered strongly from a loss of just over R2 billion, amounting to a 615 cents per share profit against a 185 cents loss for 2020.
During the media briefing on Thursday, 10 February 2022, AMSA stated that an increase in free cash flow generation from R985 million in the first half to R1.9 billion by yearend resulted in a reduction of net borrowings from R3.6 billion to R1.258 billion.
This performance followed a R2.7 billion reduction in a large payable with extended credit terms.
“This represents meaningful progress against one of our key strategic pillars, which is to improve the financial resilience of the business by operating on a net cash funding basis,” stated Verster. Furthermore, he emphasised that these results were far from effortless.
He says that these results were achieved thanks to the significant efforts of employees and service providers throughout the year to overcome several obstacles, which included:
- Ramping-up production and restoring stability after the restart of operations in late 2020 and early 2021 and after interruptions due to disappointing and unacceptable safety incidents.
- Adverse impact of the civil unrest and the spill-over effects of the paralysing labour strike in the downstream industry, necessitating rapid rebalancing of dispatches to export markets.
- Unreliable electricity supply at both generator and local municipal distribution levels, and worsening rail logistics services aggravated by significant fire damage at Transnet’s Richards Bay facility.
- Extreme volatility in international coking coal prices in the second half of 2021.
Moreover, Verster noted that overall positive but divergent dynamics characterised the global steel environment for 2021 in the year’s first and second halves.
The first half of the year saw a robust recovery in demand, owing to low supply chain inventories and a robust recovery in steel spreads (the difference between steel prices and raw material costs).
According to AMSA, China reduced the incentive to export steel in the first half by cancelling VAT export rebates.
Given the size of China’s steel industry and the magnitude of its exports, this represented a significant shift in the medium-term prospects of the global non-China steel industry.
There was continued positive demand in the second half, though with steel prices off record highs. The half also saw falling iron ore prices and volatile coking coal prices in response to easing supply constraints among exporters and notable economic interventions in China.
Global crude steel production increased to 1,910 million tonnes in 2021, returning to pre-pandemic levels sooner than expected (except in China). This performance is 68 million tonnes (or 4%) higher than in 2020, reflecting pent-up demand from mining, construction, and manufacturing activity, as well as a notable recovery in the automotive industry and higher fixed capital formation levels.
Average international dollar steel prices increased by 91%, iron ore by 48%, coking coal by 82% and scrap by 68%.
- Africa’s output increased by 27% to 16 million tonnes due to higher South Africa and Egypt production.
- South Africa’s crude steel production increased by 28% to 5 million tonnes.
- ArcelorMittal South Africa’s average capacity utilisation increased from 42% in 2020 to 60% in 2021 and is currently at 79%.
- The company’s crude steel production increased by 34%, or 769 000 tonnes, from 2,2 million tonnes to 3,0 million tonnes in 2021.
In South Africa, apparent steel consumption (ASC) for 2021 increased by 25% to 4,5 million tonnes, driven by the recovery of construction, mining and manufacturing.
ArcelorMittal South Africa’s total sales volumes increased by 13%, or 284 000 tonnes, to 2,5 million tonnes compared to 2020, due to a 16% rise in domestic sales to 2,2 million while exports decreased by 5% to 302 000 tonnes.
The regional mix of exports improved significantly with Africa Overland customers at 218 000 tonnes, representing a 47% increase.
The company’s overall realised steel price in dollars increased by 62%. In rand terms, these realised steel prices increased by 47% as the average dollar/rand exchange rates strengthened by 10%.
Total steel imports of primarily hot rolled coil, galvanised sheet and tinplate increased by 47% to 1,4 million tonnes in response to inventory rebuilding in the local market.
This volume constituted some 30% of South Africa’s ASC (2020: 25%).
In addition, Verster emphasised, “ArcelorMittal South Africa continues to support actions which target unfair trade practices in the jurisdictions where it operates and trades. Last year proved to be a particularly active year and globally, the unfair practices which initially led to protection being implemented, remained prevalent with risks intensifying as supply constraints ease and markets normalise.”
Steel inventory levels have largely normalised as demand and supply trends return to normal.
Additionally, business conditions in South Africa proved to be more difficult than anticipated, particularly in the second half of 2021. This was due to the negative impact of events such as the July civil unrest, downstream labour disputes, lockdown uncertainty, ongoing electricity load-shedding and municipal distribution network failures.
In contrast, the prospect of significant progress on the renewable energy build program, the private sector’s potential involvement in rail and port logistics, the advancement of the next tranche of “shovel ready” projects within the Infrastructure Investment Programme, and positive spin-offs for growth from the upcoming band spectrum auction, provide some reason for optimism.
“ArcelorMittal South Africa is the only primary producer in South Africa which supports the downstream industry through a formal support programme. This support saw a 67% year-on-year increase in value-added export assistance and rebates to R308 million.”Kobus Verster – AMSA CEO
Diversifying the sourcing of strategic raw materials yielded significant benefits. The company’s raw material basket (iron ore, coking coal, and scrap), representing 43% (2020: 41%) of cash cost per tonne, was 10% higher in rand terms, which is satisfying given the 42% increase in the international raw material basket in Rand terms.
Fixed costs increased from R5 066 million in 2020 to R7 428 million in 2021, an increase of 47%. Consumables and auxiliaries, which represented approximately 30% of cash cost per tonne (2020: 32%), increased by 5%. Electricity tariffs increased by 14%.
This was primarily due to the company’s deliberate, responsible, and well-considered decision to invest in certain critical fixed cost areas to increase reliability and quality.
In addition to the extensive maintenance program, the Vanderbijlpark and Newcastle operations completed successful blast furnace maintenance programs in November and December 2021.
Likewise, Verster explains that AMSA is committed to investing in its assets. This includes long-lead items for the Newcastle Works’ blast furnace mini-reline.
It should also be noted that the company will be shutting down furnaces at Newcastle Works in the coming weeks to preserve stock. As a result, Verster emphasises that this will not have a long-term impact on the local steelworks. Rather, the furnaces will be shut down for 16 hours per week to increase efforts to replenish stocks and create a maximum buffer in terms of inventory.
The company’s planned stock currently stands at two months from April, which is why it is ensuring that its furnaces, staff, and clients will not be impacted and is now taking steps to resolve the issue.
“A return to stable, reliable production is key to our commitment to improving our customers’ service experience after a difficult 2020 and early-2021,” adds Verster.
Exacerbated by South Africa’s high electricity and logistics costs, improving ArcelorMittal South Africa’s position on the global cost curve while simultaneously improving its product offering to customers will be critical for the company’s next phase of Transforming for Sustainable Growth.
The company’s Business Transformation Programme (BTP) contributed a further R2 085 million (2020: R1 543 million) in improvements, bringing the cumulative benefit achieved since the programme started in the second half of 2018, to R5,6 billion.
Safety, Environmental, Social and Governance (ESG)
The company’s financial performance was sadly overshadowed by its safety results.
“We are saddened by the six fatalities in 2021 and improving our safety performance is our highest priority,” commented Verster.
“With the assistance of various parts of the ArcelorMittal group and external advisors, we have intensified our efforts by rigorously applying the necessary safety tools and accelerating in‐person training. We are doing all we can to ensure fatalities and injuries are eliminated in our business.”
With the aid of external specialists, front-line managers and supervisors are being upskilled in areas such as safety engagements, observations and interactions, and risk awareness and analysis.
The company’s lost-time injury frequency rate (LTIFR) increased from 0.58 to 0.98, while its total injury frequency rate (TIFR) increased from 7,21 to 7,80.
Aside from ongoing vigilance against Covid-19, ArcelorMittal South Africa launched its own vaccination program in the second half of 2021. By early February 2022, over 2 500 doses had been administered on-site.
ArcelorMittal South Africa has made significant progress from the second half of 2021 to develop various options to achieve a material reduction in carbon intensity by 2030 and net-zero by 2050.
Numerous opportunities have been identified, central of which is energy efficiency improvement, both non-capital and capital-intensive. Establishing and adopting an international carbon price, supportive policies, and financing mechanisms are critical. The benefits of early-mover advantages are being investigated with various private and public sector entities.
“This represents an unprecedent opportunity to redefine South Africa’s industrial footprint,” says Verster.
Global steel demand is expected to remain generally positive through 2022. Thankfully, demand in South Africa and neighbouring countries is expected to return to more moderate growth levels.
Due to a combination of supply-side constraints and interventions, along with the sporadic demand momentum (especially in developing economies), international steel prices are off the 2021 highs, although prices continue to receive support from strong raw material prices.
Overall, Verster highlights that this view is conditional upon central banks’ responses to rising inflation, the extent to which growth slows in China and the progress with vaccination coverage, especially in developing countries.
The company intends to improve production reliability and increase customer focus through 2022, though volume recovery will be dependent on rail service reliability.
After safety, securing the first benefits of the Value Plan Programme (VPP) – the successor to the company’s successful Business Transformation Programme – will be the key focus area for AMSA.
As the steel industry remains largely positive for South Africa and the Newcastle community, what are your thoughts?
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