ArcelorMittal South Africa (AMSA) is considering various asset disposals as part of a plan to strengthen its balance sheet, which remains under pressure as a result of a protracted period of lossmaking, which has endured since 2010.
The JSE-listed steelmaker declared another headline loss of R2.52-billion for the year to December 31, 2017, a modest improvement on the R2.59-billion loss reported in 2016.
The latest loss came despite 19% improvement in revenue to R39-billion, primarily on the back of price increases during the period – the average hot-rolled coil (HRC) selling price rose 23% to R8 509/t.
However, the increase in steel prices was insufficient to offset the impact of higher raw material costs, as well as a recovery in the value of the rand against the US dollar during the year. The South African unit improved to an average of R13.32 to the dollar, compared with R14.72 in 2016.
New CEO Kobus Verster said the further strengthening of the rand since December was likely to have a material negative impact on its earnings over the coming six months, during which AMSA expected to increase sales, notwithstanding a subdued outlook for steel demand.
Domestic sales should grow as AMSA replaced imports, which were expected to continue to fall as a result of tariff protection secured from government over the past two years. Imports fell last year to 25% of apparent demand of 4.8-million tons from a peak of 30% in 2015 and 2016.
Export sales were also forecast to increase in the first half of 2018, owing to higher international steel prices and demand.
However, initiatives aimed at shoring up the group’s debt-heavy balance sheet would continue in 2018 and could include assets sales, further reductions in staffing levels and halting of nonprofitable production lines, such as the tin plant. During 2017, AMSA’s net borrowings surged to R3.2-billion from R290-million in the previous year.
However, in the 2017 financial statement the board said that, based on the group’s 12-month funding plan, as well as continued support from ArcelorMittal Holdings, the group would have sufficient funds to pay its debts as they became due over the next 12 months and would, therefore, remain a going concern.
In August, AMSA initiated Section 189 consultations with labour relating to the redeployment of staff from lossmaking operations to other parts of the business.
No forced retrenchments were considered, but outgoing CEO Wim de Klerk, who officially handed over to Verster on February 1, reported that AMSA’s compliment of fulltime employees had, nevertheless, fallen by 433 people and was likely to decrease further. The group still employed 13 000 people.
Besides reducing labour costs, AMSA was also assessing prospects for the sale of noncore assets, which could include its stakes in both Macsteel International and Consolidated Wire Industries. It had no intention, though, of exiting its main operations at Vanderbijlpark, Newcastle and Saldanha Bay.
CFO Dean Subramanian revealed that AMSA’s 50% stake in Macsteel International had a carrying value of R4.2-billion, which was not reflected as all in the group’s share price. However, Verster stressed that the final list of noncore assets was still being drafted and that disposals would only be pursued under favourable market conditions.
The immediate focus, therefore, was on cost savings initiatives, with R1.5-billion-worth of savings having been identified, mainly through procurement reforms.
AMSA would also pursue alternative raw material options, including the briquetting of iron-ore fines at new plants in Saldanha Bay and Vanderbijlpark and by increasing scrap consumption.
Discussions were also continuing with both Transnet and Eskom on ways to reduce logistics and electricity costs, with a key focus area being a reduction in the winter electricity tariff charged by Eskom to Saldanha Steel.
“In terms of fixing the balance sheet, firstly, we have to stop making losses, because that is the biggest contributor to the debt. Then we will look to reduce some of our excess stock and focus on disposals,” Verster outlined.