Rock bottom for Arcelor Mittal SA? Perhaps. It surely can’t get much worse

For Newcastle-raised university students, the best vacation job by far is at the local Arcelor Mittal steel mill. I  was lucky enough to land one over the 1979  Christmas holidays, spending it working 12 hours a day, 7 days a week as an Operator. Including the double time earned for overtime (and on Xmas Day itself) that temporary position generated enough to pay for the whole of the next year’s university tuition. Or, as happened in my case, it provided a grub-stake big enough to finance a move to Johannesburg and see me through a few months of  internship wages as a trainee financial journalist at The Citizen.  Those days the company was State-owned Iscor. Since then it listed on the JSE (1998) , almost went bust and as a result became part of the global Arcelor Mittal empire. Through those changes,  the Newcastle plant has continued to churn out millions of those billets I spent hours putting into and removing from the furnace. Having spent so much time exposed to the guts of the operation, I’ve always looked forward to my interviews over the years with the CEO of the steel group, whose South African operation is listed in the JSE. This year’s chat with Nku Nyembezi-Heita was no exception. The latest financials were awful, reflecting a continued slide in the bottom line. Our discussion starts with my question on whether the group has now reached rock bottom. – AH

NONKULULEKO NYEMBEZI-HEITA: Recovery might be a few years out, so it has been one of those times where we think its coming and then it doesn’t. Last year we swallowed hard and thought this could be a long haul.  This year, in the first half, clearly the fire in February and March at Vanderbijlpark, resulted in the underlying performance of the business that was not a positive result. As we mentioned at the announcement today, the impact at IBIDA level of that fire was R765M.

ALEC HOGG: Was it insured?

NONKULULEKO NYEMBEZI-HEITA: It was insured.  At this time we have not received any pay-outs from the insurance companies. it’s still in process, because we’d had a very, very large incident in the prior two year period.  Clearly you can imagine this is a very, very tough negotiation.

ALEC HOGG: You produced 400,000 tons of steel more than you sold in this period.  Where do you put 400,000 tons of steel?  And then as a follow-up to that, do you start cutting back production?

NONKULULEKO NYEMBEZI-HEITA: Well, it was at liquid steel level that we had a 400,000T surplus, so then you can imagine some of it is finished stock; some of it was work-in-progress all through the chain.  The reason it was so high, at the end of the period, was the fact that customers just couldn’t take any more material, their floors were full.  When we had the fire, we thought we’d be out for 3 months.  People did’nt believe us so they added another month. They imported for a four month outage. We recovered a month early and started to catch up backlogs much quicker than anybody had thought.  So, that basically meant that there was a back-up in the supply chain, which we’ve now caught up on in the third quarter.

ALEC HOGG:  Operating margins look horrible, 1½% down from the normal 6% to 7% at the operating level.  We can hope that will be turning around, but I guess, the other bare point that we need to look at is the exports, they almost collapsed down 40% in this time.

NONKULULEKO NYEMBEZI-HEITA: As you would expect, because where we have shortage of steel, we always prioritise the domestic market.  This is where we get the best yields from a profit perspective and these are our core customers.  So, to the extent that we had suddenly a short-fall in steel production, out of the 2 months that we were out of the market, we would prioritise domestic customers.  And remember, the way we mitigated the disaster in Vanderbijlpark is that we diverted 75,000 tons of steel from Saldanha. Saldanha is where primarily we would be exporting from.  Now that we’re back in full production in Vanderbijlpark, they’re back in the export market.

ALEC HOGG:  So, it’s not something to worry about longer term?  The big question, I guess, for bills on your stock is when is the infrastructure programme, this R4trn that Jacob Zuma’s spoken about, going to start kicking in?  Are you seeing any green shoots?

NONKULULEKO NYEMBEZI-HEITAIt’s hard to answer that question without giving the bulls a reason to be bears.  We have not seen any infrastructure built this year.  We certainly did last year a little bit and the year before.  it was Eskom that was driving steel consumption demanded at that point.  Nothing’s driving it at the moment and to just show you how small that green shoot is, the only industry sector of any significance right now is the renewable energy sector and that only took 30,000 tons of steel in the first 6 months, we need a lot more than that so the absence of those starting to come to the fore, makes it difficult to answer that question with any kind of certainty.  Certainly I don’t think this year.

ALEC HOGG:  The thesis is that the construction industry was colluding.  Government didn’t want to give them any business until it had sorted that out. The construction industry has now been given its fines by the competition commission and promised never to be naughty again.  Perhaps this is going to open the taps.  Is that a thesis that is too simplistic for you?

NONKULULEKO NYEMBEZI-HEITAI would imagine that if I was sitting in the union buildings, I would be far more concerned about 4,7 million people out of work than I would be about construction industry bosses colluding and I don’t believe for a second that government would sacrifice South African economic growth for something of that nature.  So, no I don’t believe the thesis and I would be really perturbed if in fact that was the reality.

ALEC HOGG:  But there’s lots of money. The money’s available.  The projects have been identified, but infrastructure not’s happening.

NONKULULEKO NYEMBEZI-HEITAI cannot answer that question.  I think Mr Patel and the rest of the presidential infrastructure coordinating committee members could probably tell you in reality what is holding that back, but I know that there’s a lot of work that been done, a lot more streamlining of plans and how they get delivered and making sure that there’s capacity to do that at that level.  So, hopefully when we start seeing the roll-out, it will happen at a fairly fast clip, but I speculate.

ALEC HOGG:  We have to look into that in the future.  You mentioned the competitions in the construction industry.  You’ve had your own issues with the competitions commission.

NONKULULEKO NYEMBEZI-HEITAYou speak in the past tense.  I have my own issues.

ALEC HOGG:  You have your issues.  You took a different line.  The construction guys decided to tell on each other and to really roll over.  From your perspective you’ve got four court actions against the competition authorities.  Why did you decide to take a more hard-line attitude?

NONKULULEKO NYEMBEZI-HEITABecause the biggest is the Longstone matter and that pertains to activities that occurred in the year 2000 / 2002. I think we need to be convinced that the activities that we are been charged of, have continued into a more recent time frame so that they have a right to charge us of them. We would not, in the first instance, think that there was anything for us to do. I am pretty certain that when I came in, we cleaned up anything that could have happened. We brought in external lawyers are fairly confident that the company was clean.

ALEC HOGG:  But you still have court cases going on on the other side as well as far at the whole Kumba and ICT and Department of Mineral Resources, that story which has been extremely well publicised, is affecting you. It’s not the only competition commission investigation that you’re fighting.  When are you going to get this behind you?  Maybe give us a time, because investors love certainty.

NONKULULEKO NYEMBEZI-HEITAThe Kumba related matter is not really a competition commission related matter and luckily that should be coming to a conclusion quite soon.  Remember that has gone to the constitution court and is going to sit on 3rd September. Hopefully we will get a response from the con-court very soon after that.  So at least we’ll reach certainty on what possibly is the biggest issue in our lives. It doesn’t end there unfortunately, there’s still an arbitration proceeding that needs to ensue.  That would determine the validity of the contract for the court case . Its purely the ownership of the mineral rights and then the validity of the contract.  So, by this time next year, if all of the stars line up, we should be getting quite close to the end of those particular matters.  But going back to the competition commission, I have to remind you that we haven’t even seen the documents that have the evidence of which we’re being charged, so not much progress had been made at all on the competition front. We have not seen any evidence yet.

ALEC HOGG:  So the green shoots could be there.  In a year’s time we’ll be sitting here perhaps with a lot of the, legal issues behind us. I guess as an investor, you just have to factor that in and also start hoping that the carbon tax is not going to be too big an issue, you spoke about R600M and that the problem with the infrastructural programme not getting going is also behind us.

NONKULULEKO NYEMBEZI-HEITA: Look I think that we’re obviously talking about matters that are very specific to ArcelorMittal South Africa right this minute, but remember our financial fortunes are very tied to what happens in the economy and particularly the construction sector, as you said, that has to marry with operational stability, so where’s there’s a market opportunity we can service that.  Typically what you’ve seen in the last three years is that when we have operational problems, there was a market and visa versa. So, in this last quarter, you saw a little bit of what can happen at operational level when the two do meet, because we did have a market, there was a bounce because of bridge-docking in the second quarter

ALEC HOGG:  So, it might yet see that planets re-aligning.  That’s Nonkululeko Nyembezi-Heita, the Chief Execution of ArcelorMittal South Africa.  I really feel that if you do your homework on this one, you might find that’s a value investor’s opportunity.

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