Paul O’Flaherty is onto his third big job after holding the financial director positions at Group Five and then Eskom. It has not been an easy start. Since moving into steel maker ArcelolMittal SA’s corner office at the beginning of last month, he’s had to cope with a strike by the metal industries union NUMSA. And today investors gave his maiden set of numbers a big thumbs down, knocking the share price 7% after the interims to end June were released. But for those willing to look a little further ahead, ArcelorMittal shares look increasingly attractive. For one thing, there is much spare capacity and O’Flaherty says the business could sell everything it is able to deliver from the factory. For another, as it produces 60% of the country’s steel, ArcelorMittal is an obvious beneficiary once the Government’s long promised infrastructure programme takes off. – AH
ALEC HOGG: With us in the studio is Paul O’Flaherty, the Chief Executive of ArcelorMittal who’s been in the job for just over a month. Paul, a big difference to Eskom?
PAUL O’FLAHERTY: A big difference, but also very similar. A big industry player with lots of people, so there are many similarities.
ALEC HOGG: Lots to do with Government as well.
PAUL O’FLAHERTY: Absolutely. That’s key for ArcelorMittal, going forward. I think we need to do a lot more engagement with Government. I’m very happy with what Ministers Patel and Davies have said recently about localisation for steel. We have to talk about pricing and we need to talk about all the Competition Commission issues that we have as ArcelorMittal as well. Put it all on the table, and see where we go from there.
ALEC HOGG: Yes, there’s been quite a lot of boxing between ArcelorMittal and Government in the past. Is that something you want to get off the table…?
PAUL O’FLAHERTY: Yes, absolutely. We’re a South African company. We’re not going anywhere.
You can’t pick up these plants and put them on a ship. We’re fundamental to South Africa.
We recently did what we call our footprint report that really shows what ArcelorMittal does in South Africa – the negatives and the positives. We contribute more than one percent of the country’s GDP. We have the ability to produce six million tons of steel. We’re fundamental. We can’t fight with Government. We need to work with Government.
ALEC HOGG: The ability to produce six million tons… What are you producing right now?
PAUL O’FLAHERTY: For the first half of the year, we were just under two-point-four and that included the Newcastle operations, which are not producing because of the furnace reline and some problems in Vanderbijl in getting throughput. We’re attending to those and we need to get this operation over five million tons, going forward.
ALEC HOGG: Where is ‘break even’?
PAUL O’FLAHERTY: ‘Break even’ is as much as you can produce. Obviously, the market will dictate what price you can sell it at, but a ‘break even’ position is what we control…produce as much of the steel as possible and it will reduce your costs significantly because we have a very high fixed cost base.
ALEC HOGG: So you could, in theory, because you have a capacity of six million tons. If you were able to, you could make all six million tons and find a market for it.
PAUL O’FLAHERTY: That’s what we intend to do. We believe the market’s there. If it’s not there in South Africa – and there is a market in South Africa. It’s there in SADC, it’s there in East Africa, and we intend aggressively driving that – at the appropriate price. We’re competing against Chinese, so it’s quite difficult.
ALEC HOGG: I’ll tell you a little secret, Paul. I worked in my university vac time at ISCOR in Newcastle as it was then (it’s now ArcelorMittal) as an operator. I know first-hand that it’s not an easy job, and that people are not always as applied as they might be. How are you going to change that? How are you going to change the mindset of people who are sometimes doing rather boring, routine tasks?
PAUL O’FLAHERTY: Yes, that’s a very good point. Where you have to start is with the leadership of the company. Make sure we’re aligned and that we say the same message. We have a very experienced Chief Operating Officer from ArcelorMittal (from Germany) who understands the operations perfectly. What we can do is make sure we get a very consistent, clear message down to the lowest level. That’s what I’m imploring everybody to do. The message is simple: fill the mills, produce at low cost, and then to the sales department, let’s go and sell this product. Those are the simple, key messages for the entire ArcelorMittal.
ALEC HOGG: It shouts at you. If you can produce more, you will go back into profit. With this first half of the financial year, you still haven’t broken into the black.
PAUL O’FLAHERTY: No, we haven’t and it’s production, production, production. That’s what we need to do.
ALEC HOGG: From your perspective – these are not your results. You only started on the 1st of July. What are you hoping to put on the table… given that you arrive in the office and have a metal industry strike? It hasn’t been an easy start.
PAUL O’FLAHERTY: No, that wasn’t a great start. I take accountability for the results because I’m representing the team. I’m talking on behalf of the team when we represent these results. I challenged the team today in our media release.
We’re going to live this, we’re going to live it together, and we need to start producing because shareholders will grow tired of the same stories. This team needs to produce.
ALEC HOGG: So when we talk to you in six months’ time…
PAUL O’FLAHERTY: Yes, I’m certainly hoping that…we’ve set ourselves a target. This year is going to be a difficult year. We have to catch up the dispatches from the strike. We have to bring Newcastle back. It’s delayed already a month – we have to bring that back and make sure there are no more delays. We have to make sure that what we’ve been seeing in Vanderbijlpark is consistent. We have to get better management and forecasting on our iron ore from Kumba. Certainly, in the fourth quarter we’re hoping to see some changes so that we can then say ‘this is going to be sustainable’. The first quarter of next year…yes, we’re hoping we can start showing what can be done – all things being equal.
ALEC HOGG: That is just around the corner. You didn’t take this job just for a nine-month period.
PAUL O’FLAHERTY: No.
ALEC HOGG: When you’re looking deep into the future, when do you think that ArcelorMittal (in your estimation) can actually really hit its stride, and can produce that six million tons?
PAUL O’FLAHERTY: Fundamental to this is our engagements with Government around the infrastructure projects. We have almost an annuity base of steel that we sell every month out of the factories. Customers take it. We’re reliant on the country’s GDP because if that grows, then obviously, we are part of that and the special projects that are coming out…we need to be fundamental to that. As soon as we can be part of that solution – and hopefully next year we’re going to see some movement. I see Minister Patel is very keen to start rolling. Next year is going to be a very interesting year for ArcelorMittal, I think, to see what we can do.
ALEC HOGG: You know the construction sector well. You played there before. When we talk to industry executives from construction, they say we’ve been hearing the story from Government for many years – there’s been no beef. Do you think that something has changed, that next year you will see this coming through?
PAUL O’FLAHERTY: The one fortunate thing about being at Eskom is sitting on the other side of the fence, being involved in the strategic infrastructure projects, and being involved in the discussions around it. The game plan is good. The game plan is clear. What needs to be broken down is more the relationship between Government and private enterprise – how private enterprise fits into the solution, because you cannot do it without that. The plans are there. It’s about execution. This is about execution and I’m confident that the more private enterprise is engaged and part of the solution with Government – break down any mistrust there is – we need to start doing this. I think every South African knows we cannot continue on these unemployment rates. We cannot continue on GDP that’s going down like this. The infrastructure program and the National Development Plan is critical and we subscribe to that.
ALEC HOGG: You say ‘every South African knows’ – in both sides of the fence…politics as well?
PAUL O’FLAHERTY: Yes, the GDP as the latest estimates that I see may be less than two percent. That’s not sustainable. Those are not the estimates… Eskom asking for a revision of the price is a perfect example. It’s not because Eskom don’t know what they’re doing about their cost. They based it on a certain sale of electricity because they have a high fixed cost base. That’s dropping. That’s declining, so that’s making it more and more expensive. GDP has to grow. Infrastructure is the key.
ALEC HOGG: From the position that you’re sitting in right now, there are two turnaround factors. (1) The country’s infrastructure program really kicking off and (2) getting those mills to produce to maximum capacity.
PAUL O’FLAHERTY: Absolutely.
ALEC HOGG: When you look at Eskom – and you just mentioned that a moment ago –, are you finding that Eskom is now also starting to come to the party? If Eskom isn’t successful then all companies – not just ArcelorMittal – will struggle.
PAUL O’FLAHERTY: I think, and obviously, I’ll be biased on this comment. I think Eskom is and has been at the party.
The issue for Eskom is how do you fund it and that always remains the fundamental challenge.
It was a challenge when I was there and it’s a challenge today. The Regulator, when we applied for the tariff, we applied for a much higher amount. We didn’t get that and that immediately puts Eskom into a problem from a financial sustainability point of view. I can assure you that the people at Eskom work hard to reduce their costs. They do what they can, but you can’t sacrifice your maintenance programs so the financial sustainability – and I believe as we did in the past, that they’re working together with National Treasury and the Department of Energy in finding an ultimate solution. If it’s not the tariff payer, who is it that’s going to provide the solution for Eskom?
ALEC HOGG: The other question seems to be more politically charged – that there’s R3bn owed to Eskom by municipalities, which is unlikely to ever be paid. If that is continued into the future, those who do pay are going to pay for those who don’t.
PAUL O’FLAHERTY: That R3bn is quite historic, so it’s been built up over many, many years. It’s not as though today there’s a current amount owing from municipalities. That’s a very history issue in a particular area, which needs to be dealt with, and it is a political issue. I believe that Eskom and Government will find a solution on that.
ALEC HOGG: Paul, just to close off with, these results were very disappointing to investors – the share price down seven percent from an already low level. Is this the trough?
PAUL O’FLAHERTY: I hope so. I can’t get into an investor’s mind (what they’re looking for), but ArcelorMittal is a long-term investment opportunity. It’s not going to show short-term spikes. It’s hopefully at the bottom. It’s not producing, as I said, through various factors. My view is that with the team, we can’t go lower than this. We, as management, can’t allow ourselves to do this. We need to claw back and that’s what we intend.
ALEC HOGG: Paul O’Flaherty is the Chief Executive of ArcelorMittal.
