ArcelorMittal sees FY profit cut two-thirds

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FIFI PETERS: ArcelorMittal South Africa released its annual results today. The steel-making company blamed higher costs and weaker demand from its local and international markets for its profits plunging by over 50% in the year to December [2022].

We’ve got Kobus Verster, the CEO of ArcelorMittal South Africa, with us for more on the numbers.

Kobus, thanks so much for your time. It does look like it was a pretty difficult year for the group, and in some parts of the business you say it reminds you of the difficulty of the 2008 global financial crisis. Just describe the operating environment you had to contend with.

KOBUS VERSTER: I think especially in the second half of the year it was particularly difficult. Overall it started with prices coming off substantially internationally. Our prices lagged a bit, but on a net basis for the year prices for steel were up 17% while costs were up by 34%. So you can see that enormous cost squeeze, and that on the back of reduced sales volumes of around 13%. Obviously some external interruptions also caused an increase in our operating cost.

FIFI PETERS: What hit sales this time around, and are those pressures still with you two months after your year[-end]?

KOBUS VERSTER: Well, sales are down 13%. Apparently consumption in South Africa is down 12%, so we are particularly in line with a reduction in local demand; so basically from a market share perspective our position is constant. But the local demand situation, obviously following the weak economy, is quite low.

FIFI PETERS: The reconstruction recovery plan that has infrastructure at the centre of it – we’ve been hearing about it for over two years. We’ve been hearing that there’s been progress. Are you saying that you’re not seeing that trickle through to your business?

KOBUS VERSTER: I think in the past year definitely not. There’ve been no major projects and I think the main steel-consuming sectors actually performed substantially poorly.

If we look ahead for the coming six months, if we listen to the enquiries out of the market, there’s definitely potential for a better demand environment in the local market.

We also see that our neighbouring countries in sub-Saharan Africa are all growing at a rate substantially better than South Africa. So I think for the coming year our focus will be to increase [our] share in that, but also to focus on replacing some of the imports [coming] into the local market.

FIFI PETERS: From where? I know that traditionally the industry has had to contend with an influx of imports coming from places like China. But throughout the year we also saw China having its own supply disruptions as a result of the Covid lockdowns in that country. From where have imports been the most impactful?

KOBUS VERSTER: Actually from a broad range. I think what happened internationally, in the second half especially, was we had quite low activity internationally. And many steel producers sort of put their excess production into countries like South Africa – those being Japan, Turkey, and to a lesser extent maybe Russia. But even in Japan, we see some [of this activity].

FIFI PETERS: Load shedding. How is that impacting your business? I ask this because, if you look at some of the manufacturing numbers that have come out recently, they point to a certain level of resilience, suggesting that manufacturing companies are contending with the load shedding pressures [despite] the fact that things are pretty dark out there. How is load shedding impacting your business, and what level of load shedding for you as ArcelorMittal is okay? And what level becomes a crisis point?

KOBUS VERSTER: I think load shedding for us is in the form of load curtailment, so it does impact our production.

But it’s a process directly managed by us and by Eskom, so we don’t have sudden surprises, except every now and then in terms of municipalities.

The load shedding impact is more on the downstream. The demand domestically is lower because downstream factories and converters have more challenges in terms of that, and that also impacts a lot on sentiment.

Hence the demand side is more impacted by the energy issue in South Africa than from a production-interruption perspective.

We are much more affected by the inability of Transnet to actually service us.

FIFI PETERS: Like most other exporters and mining companies. What has been that opportunity cost as a result of the shortfalls of Transnet?

KOBUS VERSTER: We estimate the rail service directly and indirectly had an around R1.3 billion impact last year on us. At the start of the year [2022] we had to stop our large blast furnaces because of the unavailability of raw materials. And in the latter part of the year we were unable to service customers because most of the truck transporters were sort of redeployed to the coal corridor, following the issues they had on that line.

FIFI PETERS: And now? Has the situation improved?

KOBUS VERSTER: We are working closely with Transnet Freight Rail so I must admit from an operating perspective there’s excellent cooperation. We’re obviously aware of the challenges they have in terms of locomotives and spares and those types of things. But the service level is not where it should be. So it’s a bit of hand-to-mouth on a weekly basis.

FIFI PETERS: Kobus, you mentioned the fact that you were seeing quite a bit of activity in the markets outside South Africa on the rest of the continent. Which parts of the continent are you most excited about in terms of the outlook for the year ahead?

KOBUS VERSTER: I think it’s all sort of the countries close to us where we can service through Africa [on] land, not [by sea]. Typically Zimbabwe is very active. Zambia is showing good progress. There are places like Lesotho and Mozambique. So in these neighbouring countries I think there’s reasonable opportunity. I think activity and access is actually quite reasonable.

FIFI PETERS: Your outlook is fairly positive. There’s quite a strong undertone of optimism that comes out in your group outlook for the year ahead. What’s informing that? Where are you seeing green shoots for your business?

KOBUS VERSTER: Well, I think from an evidence perspective we saw prices start to recover at the back end of Q4 last year and early in January [this year]. So there’s a positiveness. I think the fact that China has reopened after their Covid restrictions and lockdowns [means] China will play a big role in the fortunes of steel in the coming year. From that perspective we also believe a reasonable amount of restocking occurred towards the latter part of last year. So apparently steel consumption and real demand should be much more in sync in the first half.

FIFI PETERS: Okay. We’re counting down to the State of the Nation Address by President Cyril Ramaphosa. Any asks? What is your expectation going into this?

KOBUS VERSTER: Well, I hope we see some real action around the energy issues, maybe some more forceful indications of actual large infrastructure roll-out and spend. Maybe more firmness on the third-party access of Transnet.

All these things will lead to economic growth, which is seriously required to ultimately reduce unemployment and assist many South Africans.

FIFI PETERS: Okay. Let’s see what he does eventually end up saying.

Read: Ramaphosa declares state of disaster over energy crisis

Kobus, we will leave it there for now, sir. Thanks so much for your time. Kobus Verster is the CEO at ArcelorMittal South Africa.