ArcelorMittal South Africa reports a lower operating profit of R229 million in FY09
Salient features
• Revenue of R25.6 billion, down 36% from FY08
• Headline loss of R440 million for the year, compared to R9.5 billion profit in FY08
• Operating profit of R229 million in FY09, compared to R12.2 billion in FY08
• Q4 production volumes up by15%compared to Q3 FY09
• Q4 headline profit of R469 million after three successive quarterly losses
ArcelorMittal South Africa posted a headline loss of R440 million for 2009 compared to a profit of R9 484 million in the 2008 financial year. This sharp decline in the financial performance was due to the severe impact of the global economic downturn on the domestic steel industry, which was further aggravated by the strength of the Rand. However, the company’s financial performance improved during the course of the year. A headline loss of R844 million during the first half was followed by a profit of R404 million in the second half. This turnaround was even more pronounced in the fourth quarter with headline earnings of R469 million compared to an average quarterly loss of R303 million during the first three quarters. The better performance in the latter part of 2009 was driven by higher sales volumes and improved prices following the modest recovery in the global economy as well as a lower cost base, led by cheaper coal contracts.
Commenting on the results, ArcelorMittal South Africa CEO Nonkululeko Nyembezi-Heita said: “2009 was undoubtedly one of the toughest years experienced by the company and our disappointing financial results for the year reflect the poor trading conditions. But we are encouraged by the gradual improvement in our business during the second half of the year. While the recession and the strength of the Rand/US dollar exchange rate severely impacted the domestic steel industry, having taken measures to ensure a reduced cost base enabled us to respond quickly to the rebound in quarter four.”
Revenue last year declined by 36% to R26 billion. Sales volumes though were only down by 12%, illustrating the sharp decline in steel prices during 2009. Lower steel prices and reduced volumes were the main reasons why the operating profit fell from R12.2 billion in 2008 to R229 million last year. The decline was further aggravated by a substantial drop in earnings from the Coke & Chemicals business following a slump in demand for metallurgical coke from the ferro-alloy industry.
ArcelorMittal South Africa intensified itscost savings drive in late 2008. This strategy paid off last year with maintenance, employee and general administrative costs significantly lower compared with 2008. Furthermore, lower-priced coal contracts, which took effect towards the end of the third quarter of last year, contributed significantly to the 8% drop in raw materials & consumables expenses to R15.3 billion. Total operating costs were 9% down to R25.4 billion.
Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) fell from R2.1 billion in 2008 to R1.6 billion, but the recovery in the fourth quarter was pronounced with an EBITDA of R929 million compared to the average quarterly EBITDA of R206 million for the first three quarters of the year.
ArcelorMittal South Africa reduced its investment spending by about half to R914 million last year with spending limited to essential maintenance and key environmental projects.
Looking at wider market conditions, inventory levels amongst steel merchants and suppliers remained relatively flat during the downturn, increasing only gradually in response to the slow rise in steel prices. Although restocking was initiated at a cautious pace, growth in demand is expected to continue as suppliers replenish their stock levels and improved market conditions continue to stimulate the economy.
Since the company made a headline loss, no dividend will be declared, though the policy of distributing a third of headline earnings remains unchanged.
Operations
Production of liquid steel was cut back by 8% to 5.3 million tonnes last year as the company reduced output to match lower demand levels. The cutbacks in 2009were mostly in the flat products business where capacity utilisation levels averaged 60%. Among long steel products, capacity utilisation was just over 80% amid strong demand in the export market. With the restart of Blast Furnace C at Vanderbijlpark Works in the fourth quarter, company wide capacity utilisation rose to 78%.
Sales volumes for the year decreased by 12% compared to 2008 as domestic sales dropped by 30% to 3.2 million tonnes. This was partially offset by a 95% rise in export sales to 1.4 million tonnes, particularly to markets in East and West Africa. However, average net export prices were still significantly lower at 48% less than in 2009.
Safety
Despite sustained efforts throughout the year, our safety record was marred by the tragic loss of four lives in an accident at the Newcastle plant in KwaZulu Natal on 30 December 2009. In response, further steps have been undertaken to improve the safety of the working environment, including fatality prevention re-training for all employees and contractors during a company-wide four hour work stoppage on February 3, 2010.
Competition Commission
The case brought before the Competition Tribunal by Harmony Gold Mining and DRD Gold Limited, which was appealed and subsequently referred back by the Competition Appeals Court to the Tribunal, was settled last year without admission of guilt.
Outlook
With the forecast economic recovery, continued re-stocking among merchants and steadily improving demand for steel, ArcelorMittal South Africa expects its performance to continue to improve during 2010. Nyembezi-Heita commented: “We anticipate a gradual recovery this year in line with an upturn in many of the markets we service. While domestic steel prices remain subdued, we are cautiously optimistic that global demand will continue to show steady improvement during the year.” A further rise in headline earnings on the fourth quarter’s R469 million profit is forecast, with the extent of the increase depending on a number of variables, notably the rand-US dollar exchange rate.
On the investment front, the company is committed to prioritising its environmental spending and is moving ahead with major capital expenditure on a range of emission abatement projects at Vanderbijlpark and Newcastle. Furthermore, ArcelorMittal South Africa will focus investment on energy savings and power generation projects to cushion the impact of Eskom’s proposed annual tariff increases of 35% over the next three years. If implemented, these tariff increases will raise ArcelorMittal South Africa’s yearly electricity bill from R1.2 billion last year to R3.2 billion by 2012.
For further information:
ArcelorMittal South Africa;
Corporate communications: Sven Lünsche
Tel: +27 (0)16 889 2425
Cel: +27 (0)83 260 9279
Email: sven.lunsche@arcelormittal.com
Source: ArcelorMittal South Africa
