ArcelorMittal SA (Amsa), the country’s largest steel producer, has seen its share price increase almost tenfold over the past year as its fortunes improved dramatically.
The jump in the price from R1.94 a year ago to nearly tenfold by Friday's close, was justified this week with the company releasing its best set of annual results since 2008. Not only did it swing back into the black, reporting R6.8bn in headline earnings for the year ended December 2021 from a loss of R2.032bn previously, but it managed to slash net debt from R3.5bn to R1.3bn.
The big question is whether its performance can be sustained.
CEO Kobus Verster said: “Where the share price will be is ultimately dependent on the confidence the market gets out of the continued performance of the company, which to be honest is still unproven.
“Our balance sheet is in a much better position. But you don’t make losses for 15 years and suddenly think everything is resolved. There is still a lot of hard work, but I think we have a decent plan to further enhance the prospects of the business.”
Verster said the results were “not a once-off event” — Amsa had worked hard on its cost base over the past three years and was “reasonably successful”.
He added that one of the “positives” has been the group’s ability to “control the raw material input costs on substantially better terms than internationally, which is 43% of our cost base”.
For its operations, Amsa needs raw materials including iron ore, coking coal and scrap.
Input costs increased by just 10%, compared to a 42% increase internationally in rand terms.
Verster believes there is potential for the company to increase its volumes over the next few years, but rail infrastructure problems in SA and consequent backlogs could hamper its growth.
He said the group was working with Transnet on a daily basis in a bid to improve the transport of the group’s raw material inputs.
Analysts agree that while the company is in a strong position, it is still to an extent at the mercy of global supply and demand dynamics and steel prices.
So far conditions have been good, with demand for steel around the world steadily improving as markets recover from lockdown restrictions. Supply chain disruptions resulted in shortages of steel and pent-up demand, which supported prices and production.
Sanlam Private Wealth portfolio manager Nick Kunze said Amsa has “been quite a good story”. It was “now profitable, cash flow-positive and had got its house in order”.
“The question now is where to from here?”
Kunze said that while the boom in the share price is unlikely to be “seen again in our lifetimes”, as it came off such a low base, there could be some room for growth. The company’s price-earnings ratio is sitting at an attractive 4 or 5 and generally the market is interested in “value” stocks with price-earnings ratios of 10 to 14.
A price-earnings ratio measures a stock’s current price against its earnings per share. Having a multiple of 4 or 5 implies an investor in the company would be able get his money back on his investment within four or five years.
“Just looking at the fundamentals, notwithstanding that it has gone up almost tenfold, you would have to say they look quite cheap and in good shape,” said Kunze.
He said one problem with commodities companies is that they are dependent on spot prices, so if the “metals price basket has a big retracement, they are going to fall with it too”.
One supporting factor for SA’s steel industry, said Kunze, is that China has been exporting far less steel, as its government has shut down smelters for two to three days a week because of concerns about pollution. This means SA and other countries have not been flooded with imports, which has supported their steel sectors.
Protea Capital Management analyst Richard Cheesman said the “stars aligned” for Amsa's strong performance, with logistical issues around the world and protective local import duties in their favour for most of the period. But this does not necessarily mean a “new dawn” for SA's steel industry, he said, noting that SA’s safeguard duties lapsed in mid-August 2021.
The government still has import duties of 10% in place on steel, but until August also had additional safeguard duties on hot-rolled products.
“It is positive that China is cutting back its steel exports,” said Cheesman. “This alleviates some of the import pressures, but there are other countries that export steel. If shipping rates reduce, global logistic issues get cleared up, and without the safeguard duties we could see some of the problems that previously hindered the group coming back.”
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