Can ArcelorMittal SA survive?

2014-10-12 15:00

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Steel manufacturer ArcelorMittal SA is inefficient and underperforming, its outdated technology is costing it dearly and it is being hammered by cheap Chinese imports.

The company, which incurred a net loss of R2.1?billion last year, faces potentially fatal fines from competition authorities (where five cases against it are at the competition tribunal after referral for prosecution by the competition commission) and a potential carbon tax bill of R600?million a year.

Not only is government, with which ArcelorMittal has a particularly bad relationship, calling for it to reduce prices, it is planning a massive rival steel project of its own.

Just one of these factors could sink the company. In a perfect storm, they leave it with no chance of survival.

It is arguable new chief executive Paul O’Flaherty has seen worse, having left his position as Eskom’s financial director last year. He is matter-of-fact about what he has seen so far, and about the road ahead.

His challenges, 90 days into his new job, are palpable. Lower steel demand (it has declined 5% a year since 2007), increased competition from China, strikes, electricity shortages and the R2?billion refurbishment of its Newcastle operation have resulted in a gradual erosion of profits.

Its net loss was R2.1?billion last year, and while O’Flaherty expects it to try to break even this year as Newcastle comes back on stream, in its current form, ArcelorMittal SA is barely sustainable.

This makes it difficult for O’Flaherty to convince his major shareholder, Lakshmi Mittal’s ArcelorMittal group, to maintain interest in the company, which accounts for 4% to 5% of global revenue, but is one of the worst performers in the group and currently makes no contribution to its profit.

Newcastle should remain worthwhile but the Saldanha operation, according to O’Flaherty, was set up for the export market on the guarantee of low ore and electricity prices as well as the assumption of reliable labour and transport, none of which exist.

But the biggest problem is the behemoth in Vanderbijlpark, which is an extremely difficult turnaround challenge. He is fully aware the bulk of the 14?000 workers are there, and that without Vanderbijlpark, “there would not be a Vaal triangle”.

A measure of its size – and its inefficiency – is summed up in the fact that there is 200km of rail, internally, at the Vanderbijlpark operation.

And clouding all its problems is a strained relationship with government, which may or may not explain the Industrial Development Corporation’s steel intentions. Apart from its interest in Scaw Metals, among others, the corporation has signed an agreement with Chinese Hebei Iron and Steel for a R50?billion low-cost iron and steel facility to produce 5?million tons (more or less equivalent to ArcelorMittal’s current production) by 2017.

O’Flaherty cannot say what government’s steel intentions are, but he has been told the steel could be exported to countries in the Southern African Development Community.

But he is trying hard to “extend an olive branch” to government, adding that the starting point is his question to government on “whether ArcelorMittal is going to be a feature of South Africa or not”. Engagements so far have been constructive.

Another huge stumbling block is BEE, and O’Flaherty admits ArcelorMittal is noncompliant under the new codes.

A controversial deal a few years ago, which involved members of President Jacob Zuma’s family and the Gupta family, as well as Zuma’s confidante Sandile Zungu, was shelved.

It needs to find a partner, but O’Flaherty says the shareholder has told the local company to sort out other pillars of the BEE score card before it looks at ownership, something it is actively addressing.

ArcelorMittal also faces huge environmental challenges because it is a major polluter with its

old technology.

For every ton of steel it produces, it emits 3?million tons of carbon. “If carbon tax hits us in its current form, there is no business,” he said, adding the department of environmental affairs “is having good discussions with business and looking at various mechanisms and industries to treat differently, but they are adamant that in 2016, carbon tax will be here”.

O’Flaherty’s priority is to restore good relations with government quickly “and get on the same page on pricing and support”.

He is also “looking at the business case of all our operations and how low we can bring costs down”.

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