Steel producer ArcelorMittal South Africa could raise output to about 65% of capacity in the second quarter and would be ready to swing between product types and grades to match supply to a still opaque demand picture.
In the first quarter, production was about 60% of nameplate, with total steel sales of slightly more than one-million tons well down from the 1,4-million tons sold in the corresponding period of 2008, but up on the 915 000 t sold in the fourth quarter.
CEO Nku Nyembezi-Heita said that the results for the second quarter were expected to improve marginally as the cost of raw materials, particularly coking coal, began to reflect new market realities.
She would not be drawn on where the group expected coking-coal prices would settle. But she said that the recent price settlement in China, where prices declined 60%, to $128/t, was a “good guide”.
An analyst, who requested not to be named, said that he was not surprised by the poor earnings performance, given prevailing market conditions. He indicated that he was expecting earnings for the full year to fall by about 65%, with a market recovery only likely in the second half.
Another analyst said that she was factoring in an average hot-rolled coil price of $465/t for the year, and that the real pick-up in demand and prices could only be expected in 2010.
The analyst was also cautious about the prospect of South Africa’s infrastructure expenditure being able to take up the demand slack left by the country’s struggling manufacturing sector.
Unlike its parent, which hinted last week at a possible price recovery in the second and third quarters, the South African business said prices for steel products in the region were expected to remain weak.
The group expected domestic sales volumes to increase slightly during the second quarter as the destocking process neared its end. Stock levels were estimated at ten weeks and ArcelorMittal South Africa saw those “norma- lising” to around eight weeks by the end of the current quarter.
“A decline in inflation, further likely interest rate cuts and government’s commitment to continue with its infrastructure programme should also improve consumer and investment spending as the year progresses,” Nyembezi-Heita said, adding that there were signs that steel demand arising from the country’s R787-billion infrastructure programme was beginning to show through.
Steel demand had been particularly strong from power utility Eskom, which was currently building two new coal-fired power stations, with a combined price tag of more than R200-billion. Demand from the Medupi power station site, in Limpopo, had picked up strongly and was expected to rise further in the second quarter, and ArcelorMittal South Africa expected that steel demand from the Kusile power station, in Mpumalanga, would pick up by the end of the year.
African demand was also beginning to recover after the slump of the fourth quarter and the group reported that 70% of its exports in the first quarter had been directed into the region.
It added that demand from infrastructure programmes in Angola, Kenya and Tanzania was recovering and should “normalise” in the second quarter.
The group was also continually reviewing its production strategy and mix, but said that there had not been a market difference in the fall-off in demand between long and flat products.
However, it added that the outlook for long products was probably superior, owing to the continued infrastructure spend and the slump in demand from the manufacturing sector, particularly the struggling automotive industry.
The group, which has hitherto refrained from retrenching permanent staff, despite increasingly torrid market conditions, indicated that it could not give “any guarantees” on the employment front.
It indicated that there were no immediate prospects for a recovery in demand and prices, after reporting its first quarterly loss since the unbundling of the steel and mining units of Iscor in 2001. It declared a headline loss of R237-million for the first quarter of 2009, a big reversal of the R2-billion profit reported by the group during the corre- sponding period in 2008.
“Given today’s realities, it is impossible to give any guarantees,” Nyembezi-Heita said, adding that if prices continued to slide, the JSE-listed company might be forced into shutting unprofitable units.
Should such a course of action be followed, there were likely to be consequences for jobs.
ArcelorMittal South Africa reduced prices again from May 1, announcing cuts of between 7% and 13% across both its long- and flat- product ranges.
General flat-steel prices fell by between 9% and 13%, depending on the grade, while general long-steel product prices declined by between 7% and 10%.
The May decline follows on several previous cuts, starting in October last year, with the net effect being that South African steel prices have now dropped by an average of between 55% and 60% since their historic peak recorded back in September.
The latest cut comes on the back of the recent rand strength against the US dollar, and despite the fact that there has been some flattening out of prices in foreign markets. ArcelorMittal South Africa calculates its prices using a basket of domestic selling prices in six foreign markets and adjusting the result to the rand:dollar exchange rate.
In a letter to customers dated April 30, 2009, the JSE-listed company said that the new prices would apply to all orders confirmed for delivery from May 1.
Hot-rolled and cold-rolled coil prices fell by R700/t, while plate, colour-coated and galvanised material declined by R1 000/t. The ‘base price’ of all its long-steel products, meanwhile, decreased on average by R500/t.
Unlike its far larger parent, the ArcelorMittal group, which had hinted earlier at a possible price recovery in the second and third quarters, the South African unit said that prices for steel products in the region were expected to remain weak.
Nyembezi-Heita indicated that the exchange rate, which had strengthened materially, would probably be the key factor in determining whether prices fell even further.
Source: Engineering News, South Africa
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