Business / International
ArcelorMittal - steel demand Vulnerable to variables
18 Feb 2011 at 17:18hrs | Views
This article was take from www.fm.co.za
With a less optimistic outlook on steel demand than its parent company, ArcelorMittal SA (Amsa) foresees a year of mixed fortunes. Global steel requirements, and with it prices, are set to rebound in 2011, bringing to an end a period of tight margins in the industry.
ArcelorMittal, the world's largest steel maker, expects global consumption to grow up to 7% this year, buoyed by rising car production and despite the slow recovery in global construction.
Amsa, however, is more cautious. It believes that demand and the prices of steel will rise in the first quarter of 2011, but that these will be partially offset by the prices of other materials and the strong rand.
The group reported a much improved set of results for the year ended December 2010. Revenue came in 18% higher at R30bn, as the strong rand was offset by a 13% increase in sales volumes.
Operating profit improved greatly from R297m to R2,2bn, translating into an operating margin jump from 1,2% to 7,3%. Headline earnings rose from a loss of R440m to a profit of R1,3bn. Consequentially headline earnings per share (HEPS) improved from a loss of 104c/share to a profit of 343c/share.
However, a headline loss of R427m was recorded for the second half of the year, indicating a headline loss per share of 106c in the second half, compared with HEPS profit of 449c in the first half . Cash generation also remained poor and no final dividend was declared.
Amsa's second-half performance was muted , after a strong first half, by the higher prices of raw materials like scrap and by slack demand as well as reduced competitiveness of Amsa's exports brought about by the strong rand .
Off this low base, Amsa CEO Nonkululeko Nyembezi-Heita says a "significant" earnings turnaround is foreseen in the first quarter of 2011, due to an envisioned increase in steel demand and higher international steel prices. However, this is expected to be partially offset by increased raw material prices, mainly scrap. Nyembezi-Heita also feels that the rand-dollar exchange rate will have an important impact on earnings.
Amsa's other risks include a potential competition commission penalty of 10% of turnover from the 2008 financial year, which could amount to as much as R4bn, says Imara SP Reid analyst Sibonginkosi Nyanga. The competition commission is investigating four cases against Amsa.
Nyanga says steel sales will increase once government's infrastructure programme gets under way but the stock "just scrapes into the 'hold' category".
Amsa's dispute with Kumba Iron Ore over the prices of ore from its Sishen Iron Ore Mine is also a risk . Iron ore from Sishen was 119% more expensive in the past financial year than in 2009.
The pair are expected to decide through arbitration who will get the rights to the contract to buy 6,25Mt/year of iron ore at cost plus 3% from Sishen.
Amsa, which held a 21,4% mining right at Sishen as well as a favourable supply agreement, failed to renew the mining right last year. Imperial Crown Trading (ICT) applied for and was granted the prospecting right, a precursor to a mining right.
Nyembezi-Heita says she expects the interim iron-ore supply agreement between Amsa and Kumba, which is due to expire in July, to be rolled over during arbitration proceedings.
Kumba is also challenging the department of mineral resources' award of rights to ICT, citing irregularities in ICT's application. The legal battle is expected to take some time to resolve. Amsa's acquisition of ICT is yet to be approved. As part of that deal, it will transfer about a quarter of its shares to black investors, including ICT. The company says a due diligence process is still under way.
Analysts have warned short-term investors to be cognisant of market dynamics and developments when considering an investment in Amsa.
The group is vulnerable to a number of external variables, such as commodity prices and exchange rates, which affect group profitability but are not under the control of management . This is compounded by the legal challenges the group faces.
Analysts feel the share is fairly valued at current levels but would recommend that only speculative investors continue holding their shares.
With a less optimistic outlook on steel demand than its parent company, ArcelorMittal SA (Amsa) foresees a year of mixed fortunes. Global steel requirements, and with it prices, are set to rebound in 2011, bringing to an end a period of tight margins in the industry.
ArcelorMittal, the world's largest steel maker, expects global consumption to grow up to 7% this year, buoyed by rising car production and despite the slow recovery in global construction.
Amsa, however, is more cautious. It believes that demand and the prices of steel will rise in the first quarter of 2011, but that these will be partially offset by the prices of other materials and the strong rand.
The group reported a much improved set of results for the year ended December 2010. Revenue came in 18% higher at R30bn, as the strong rand was offset by a 13% increase in sales volumes.
Operating profit improved greatly from R297m to R2,2bn, translating into an operating margin jump from 1,2% to 7,3%. Headline earnings rose from a loss of R440m to a profit of R1,3bn. Consequentially headline earnings per share (HEPS) improved from a loss of 104c/share to a profit of 343c/share.
However, a headline loss of R427m was recorded for the second half of the year, indicating a headline loss per share of 106c in the second half, compared with HEPS profit of 449c in the first half . Cash generation also remained poor and no final dividend was declared.
Amsa's second-half performance was muted , after a strong first half, by the higher prices of raw materials like scrap and by slack demand as well as reduced competitiveness of Amsa's exports brought about by the strong rand .
Off this low base, Amsa CEO Nonkululeko Nyembezi-Heita says a "significant" earnings turnaround is foreseen in the first quarter of 2011, due to an envisioned increase in steel demand and higher international steel prices. However, this is expected to be partially offset by increased raw material prices, mainly scrap. Nyembezi-Heita also feels that the rand-dollar exchange rate will have an important impact on earnings.
Amsa's other risks include a potential competition commission penalty of 10% of turnover from the 2008 financial year, which could amount to as much as R4bn, says Imara SP Reid analyst Sibonginkosi Nyanga. The competition commission is investigating four cases against Amsa.
Nyanga says steel sales will increase once government's infrastructure programme gets under way but the stock "just scrapes into the 'hold' category".
Amsa's dispute with Kumba Iron Ore over the prices of ore from its Sishen Iron Ore Mine is also a risk . Iron ore from Sishen was 119% more expensive in the past financial year than in 2009.
The pair are expected to decide through arbitration who will get the rights to the contract to buy 6,25Mt/year of iron ore at cost plus 3% from Sishen.
Amsa, which held a 21,4% mining right at Sishen as well as a favourable supply agreement, failed to renew the mining right last year. Imperial Crown Trading (ICT) applied for and was granted the prospecting right, a precursor to a mining right.
Nyembezi-Heita says she expects the interim iron-ore supply agreement between Amsa and Kumba, which is due to expire in July, to be rolled over during arbitration proceedings.
Kumba is also challenging the department of mineral resources' award of rights to ICT, citing irregularities in ICT's application. The legal battle is expected to take some time to resolve. Amsa's acquisition of ICT is yet to be approved. As part of that deal, it will transfer about a quarter of its shares to black investors, including ICT. The company says a due diligence process is still under way.
Analysts have warned short-term investors to be cognisant of market dynamics and developments when considering an investment in Amsa.
The group is vulnerable to a number of external variables, such as commodity prices and exchange rates, which affect group profitability but are not under the control of management . This is compounded by the legal challenges the group faces.
Analysts feel the share is fairly valued at current levels but would recommend that only speculative investors continue holding their shares.
Source - www.fm.co.za
