ArcelorMittal South Africa (AMSA) officially released its financial results for the year ended 31 December 2022. While the past year was no smooth sailing, the steel giant stated that its headline earnings dropped by 65%.
During a media briefing on Thursday morning, 9 February 2023, the following points were highlighted by Chief Executive Officer of AMSA Kobus Verster, and Suretha van Wyk, the Acting Chief Financial Officer of AMSA:
- Value Plan delivered R1 561 million (2021: R2 085 million) and fixed costs reduced by R784 million.
- EBITDA (Earnings before interest, taxes, depreciation, and amortization) down 50% at R4.2 billion (2021: R8.5 billion) as negative price-cost effect impacted margins.
- Headline earnings down 62% at R2.6 billion (2021: R6.8 billion).
- Net borrowings position of R2 808 million (2021: R1.2 billion) due to capital expenditure outflows of R1.9 billion and a R3 billion increase (2021: R6 billion) in working capital.
- 13% decrease in sales volumes and a 20% drop in crude steel production.
- 6% increase in realised dollar steel prices.
- Raw material basket (RMB) increased by 38% (Rand terms) (international RMB up by 14% in Rand terms)
When looking at the past year, ArcelorMittal’s Verster provided an in-depth look at the steel giant’s performance.
He said, “The trading environment for steel has been significantly impacted by recent economic headwinds, both globally and locally. However, our business has responded effectively as a consequence of our evolving Value Plan, together with the support of our committed employees, customers, and suppliers. Despite the sharp weakness which characterised the second half of last year, our financial results are significantly stronger than they would otherwise have been.”
Furthermore, the analysis provided by AMSA relates to the year ended 31 December 2022 (current period) compared to the 12 months ended 31 December 2021, except where otherwise indicated. The immediately preceding six months refer to the first six months of 2022.
Verster explained that AMSA’s headline earnings of R2.6 billion were down 62% (2021: R6.8 billion) as EBITDA of R4.2 billion fell by 50% (2021: R8.5 billion).
The Value Plan and the associated improvements the business has made in recent years were firmly tested in 2022.
He added that as anticipated, the international price correction in a soft local demand environment severely impacted the company’s financial results.
According to Verster, globally, steel prices declined at a faster rate than that of raw materials; this was particularly evident in the second half of the year.
The resulting negative price-cost effects placed spreads (i.e. the difference between steel prices and raw material costs) under significant pressure.
“The company could not escape the impact of last year’s energy crunch, which is evident in the large increase in imported coking coal prices (up 117% year-on-year in rand terms). Domestically, market conditions proved to be especially challenging as customers destocked, particularly in the last quarter of the year when market activity dropped dramatically in certain sectors (being somewhat reminiscent of late-2008),” emphasised Verster.
Having successfully improved average asset capacity utilisation in the second half, to 54% from 42% in the first six months—the sudden slowdown in market activity in the fourth quarter was aggravated by a shortage of readily available road trucks for sales deliveries.
According to Verster, rail logistic failures in the country’s coal export rail corridors, and the very attractive prices offered for coal, resulted in a dramatic shortage of trucks for domestic and Africa overland deliveries.
Similarly, apart from a conscious decision to restore steel inventory levels after the Newcastle blast furnace’s mid-life campaign restoration, and to hold additional raw material inventory to counter the impact of further rail disruptions, the impact of the events in the last quarter of the year resulted in lower sales levels and more finished steel on hand, leading to a considerably higher investment in working capital than forecast.
According to Verster, subject to market conditions, peak working capital investment is likely to begin to unwind towards the end of the first half of 2023 as the business adopts a highly flexible approach to its asset utilisation in response to uncertain market dynamics.
The company’s agility has enabled it to adjust its production to addressable demand, by idling plants, consolidating production at the most productive facilities, and reducing fixed costs.
“One blast furnace at Vanderbijlpark was idled in November and only restarted in early February 2023 once commercially supported by the order book. In the Long Steel business, following the restart of the Newcastle blast furnace, the Vereeniging electric arc furnace was idled in October as the combined production of Newcastle and Vereeniging is way more than current demand,” said Verster.
It should be noted that the Newcastle blast furnace mid-life campaign restoration for long-term sustainability was finally completed in 2022, at a price tag of R334 million.
According to the CEO, further strategic asset footprint optimisation will take place in 2023 within the Long Steel business as certain operations in Pretoria and Vereeniging are idled and consolidated, with products from these mills moved to rolling operations in Newcastle. This is all to improve mill capacity utilisation and productivity.
It was also noted that fixed costs were reduced by R784 million (11%) to R6.6 billion in response to lower addressable demand and the winding down of restorative maintenance activity which started in 2021.
The notable increase in capital expenditure of 115% to R2 billion (2021: R965 million) consisted of a billion (2021: R658 million) on sustainability (including safety and structures), R338 million on environment (2021: R64 million) and R658 million (2021: R243 million) on strategic investments.
A consequence of effective maintenance is equipment reliability, and of the 22 priority plants, eight have exceeded the reliability baseline measure and eight have improved on the previous year’s performance. The remaining plants, with higher priority given to coke-making and the sinter plants, will be subject to an initiative to add skills, leveraging off plant twinning with ArcelorMittal group benchmark operations.
The company’s total sales volumes decreased by 13%, or 313 000 tonnes, to 2,2 million tonnes compared to 2021, due to a 14% fall in domestic sales to 1,9 million while exports decreased by 14 000 tonnes.
ArcelorMittal South Africa’s overall realised steel price increased by 6% in dollar terms. In rand terms, this represented a 17% increase as the average exchange rate weakened by 11%.
The raw material basket price increased by 38%, with imported coking coal increasing by 117% while iron ore and scrap decreased by 4% and 2% respectively. After accounting for conversion cost, the variable cost of steel increased by 30%.
ArcelorMittal South Africa’s Value Plan realised improvements of R1.5 billion (2021: R2 billion) consisting of commercial-related initiatives of R839 million and cost-based initiatives of R722 million.
“Good progress has been made in reducing and resetting fixed costs for the current year, however, more is needed. Included in the Value Plan for the next five years is an initiative to reach a more competitive fixed cost per tonne level. The own, hired and sub-contractor labour mix, pay rate levels, and productivity will be key focus areas, along with ensuring maintenance effectiveness for every rand invested,” said Verster.
During the media briefing, it was highlighted that the company has made progress on operational planning and scheduling to better accommodate electricity disruptions.
However, load curtailment (the form of loadshedding faced by AMSA) may still interrupt the production of rolling and finishing mills, which in turn can affect production and delivery to customers, especially of high-demand products. Through careful inventory management, the company aims to minimise the impact on its customers.
According to AMSA, several notable Eskom and municipal equipment failure events were experienced in the second half of the year. While the business was fortunate to have avoided significant damage to its equipment, the risk associated with regular fluctuations in electricity supply remains high.
It was also highlighted that a common theme in all global steel cost curve benchmarking is the importance of backward integration into raw material supply.
“The company is working hard to secure further raw material opportunities, including a supportive, competitively priced logistics solution. Until its Decarbonisation Roadmap is fully implemented, the business will need to import premium hard coking coal. However, by enabling Zimbabwe-based supplies of lower quality hard coking coal, the company can remove some of the impact of the steep increases of international coking coal prices,” declared Verster.
He added that more work remains on sourcing, development and logistics. But, following a meeting between ArcelorMittal South Africa and the leadership of Zimbabwe in 2022, there is a strong commitment to identifying and executing these opportunities.
When looking at the markets, AMSA pointed out that after increasing by 4% in 2021, global crude steel production decreased by 4% or 82 million tonnes in 2022 to 1,9 billion tonnes. Africa’s output decreased by 5% to 16 million tonnes due to lower production in South Africa and Egypt. South Africa’s crude steel production decreased by 12% to 4 million tonnes.
“In South Africa, apparent steel consumption (ASC) for 2022 decreased by 12% to 4,0 million tonnes, reflecting low market activity in key steel-consuming sectors, high market inventory levels necessitating destocking, project delays due to rising interest rates, and overall weaker business confidence,” the CEO pointed out.
Total steel imports of primarily hot rolled coil, galvanised sheet and plates decreased by 13% to 1,2 million tonnes. But, this volume still made up some 30% of South Africa’s ASC (2021: 30%).
Imports increased significantly in the second half of the year by 55% to 720 000 tonnes compared to the first six months, aligned with slower global market conditions, and thus a higher propensity to offset surplus production through exports to countries such as South Africa. In the past seven years, the country’s ASC has reduced by 20%.
South Africa’s available steelmaking capacity far outstrips demand. Yet, it has lost just less than a third of its ASC to imported steel in 2022 alone.
In light thereof, AMSA stated, “Imported steel products from countries subsidising their steel production continue to affect the viability of the South African steel industry and this is why protection measures aligned with World Trade Organisation (WTO) rules are essential. However, a concerning trend – according to data from SARS – is the increasing number of contraventions of import duties, since this is eroding future growth potential of the industry and the country in the interest of short-term gains for a few.”
Moreover, Verster added, “It is with deep regret that ArcelorMittal South Africa had two fatalities in the second half of 2022 and the board and management have expressed heartfelt condolences to the families, friends and colleagues of the deceased. The company remains strongly committed to its Zero Harm goal and aims to build on the overall improved safety performance in 2022 by focusing on process risk management and cultivating a culture of care for its people.”
He further added that stamping out fatalities and serious injuries starts with behavioural changes throughout the business.
“Also, considerable resources and time were spent on accident-proofing infrastructure – buildings and machinery – to improve safety which is visible in the additional capital expenditure in 2022. Benchmarking interactions with leading South African companies will take place this year as safety remains a top priority for the business.”
With the above in mind, Verster highlighted the company’s outlook for the upcoming year. “Internationally, the World Steel Association expects a recovery in steel demand in 2023. The pressure on price-cost spreads is proving to be unsustainable and consequently there have been some positive movements in international pricing in early 2023, the sustainability of which remains untested.”
Additionally, he noted that domestically, the trading environment for the first half of 2023 is expected to be better than the last six months of 2022. Exchange rates will continue to have an impact on the business as will rail service and electricity reliability.
“ArcelorMittal South Africa will continue to react swiftly and decisively to the difficult market conditions. We will increase volumes through targeting import replacements and Africa overland volumes, following an assertive cash management process, and adopting a flexible approach to operating plants in reaction to the available order book, while adjusting fixed cost levels accordingly,” said Verster.
Wrapping things up Verster concluded, “The business is positioned to navigate the immediate and near-term challenging market conditions while remaining focused on our longer-term objectives, namely, to leverage off the long-term investment case for steel, as well as the vital role it will play in the re-industrialisation of the South African economy and the transition to a low carbon, circular economy.”
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