Mathabo Le Roux
31 July 2008
Johannesburg — A SLOWDOWN in the domestic economy has done little to slow the pace of steel giant ArcelorMittal SA, which is firing on all cylinders to meet growing local demand for steel.
Despite lower sales volumes and production sacrifices with power rationing, Mittal lifted headline earnings 45% to R4,6bn. Even as sale volumes fell 7%, operating profit rose 28% to R5,4bn. Steel prices - up nearly 80% this year, beating oil price increases - were the main impetus behind Mittal's numbers. Continued robust demand also helped.
While high inflation and rising interest rates tempered demand for steel in the automotive, durable goods and residential building sectors, demand momentum is being driven by the government's multibillion-rand infrastructure development programme.
The government is now the biggest buyer of steel, and is set to drive steel demand for years to come as Eskom's building programmes gather pace.
Mittal cut exports to the bone to feed the steel demand frenzy in the domestic market, with 88% of steel volumes going to the local market in the past six months, compared with 78% in the same period last year.
The performance is likely to rile the government, concerned at the effect of high steel prices on local manufacturers. While Mittal CE Nonkululeko Nyembezi-Heita said steel prices would be kept unchanged in September, for the first time this year, she was unmoved by criticism of the group's pricing mechanism, reiterating that it was in line with global price moves.
Sharp rises in input costs and electricity rationing spoiled the party somewhat. Scrap prices rose 76% this year and international coking coal 218%. Iron ore prices surged 85% since the beginning of the year, but Mittal has an agreement with Kumba Iron Ore to source iron ore at cost +3%.
Mittal chief financial officer Kobus Verster said the group was keen to be more self-sufficient in raw materials, and would consider acquiring coal, and possibly iron-ore, mining assets after it ironed out its understanding with Kumba on iron-ore extraction.
Mittal's expansion programme, which would see it lift output to 10-million tons a year, was on track. Mittal had board approval to build a blast furnace at its Newcastle Works to boost long steel production capacity. An environmental impact assessment was under way and construction was expected to start next year.
The move was in line with plans to expand long steel production capacity to meet increased demand for construction steel.
Electricity rationing cut production in the six months by 100000 tons. This was less than expected. Relines meant less electricity was used. Nyembezi-Heita, however, said 180000 tons would be sacrificed in the rest of the year as operations returned to full capacity and electricity use rose. The group expected to produce 8-million tons of steel this year.
With the relines at its Newcastle Works completed and stability restored at all its operations, she said third-quarter earnings were expected to increase substantially. An interim dividend of 342c a share was declared. Mittal stock rose 4,7% yesterday to R201.
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