ArcelorMittal South Africa, a major player in the country's steel industry, has made a significant U-turn on its previous decision to mothball its long-steel operations in Newcastle and Vereeniging. The company attributes this change of heart to early improvements in South Africa's electricity and logistics situations, which have provided some breathing room for operational efficiencies.
The decision to keep these operations running comes as a relief to many, as it means the preservation of approximately 3,500 direct jobs and thousands more indirect jobs within the steel consumption value chain. These facilities in Newcastle and Vereeniging are crucial for producing long-steel products such as fencing material, rods, and bars, which are essential for the construction, mining, and manufacturing sectors.
This reversal marks a stark contrast to the company's November 2023 announcement, where it had planned to shut down steel operations that were operating at a loss. At that time, ArcelorMittal cited several challenges, including Eskom's frequent blackouts, Transnet's inability to efficiently rail goods to market, and what it perceived as government policy blunders in failing to protect the local steel industry. The company also pointed to lower demand for steel products due to weak domestic and global economic conditions.
The improved situation that led to this decision is primarily attributed to increased power generation by Eskom, with no blackouts reported for about three months. This stability in electricity supply has allowed ArcelorMittal to enhance its operational efficiencies. Additionally, Transnet, the state-owned freight rail company, has shown early signs of improvement under new management, reporting an increase in rail volumes and improved port operations.
Despite this optimistic turn of events, ArcelorMittal South Africa still faces significant financial challenges. The company has warned of weak financial performance for the six months ended 30 June 2024, with an expected worsening of its headline loss per share. This news caused a sharp reaction in the stock market, with the company's share price dropping by up to 14% during intra-day trading before settling at a 4.8% decline.
The weaker financial performance is largely attributed to significant instability at ArcelorMittal's Vanderbijlpark blast furnaces during April and May, which resulted in sales losses and higher costs. In response to these financial pressures, the company has requested its workers to consider not asking for above-inflation wage increases, although this appeal has not been successful so far.
Looking ahead, ArcelorMittal South Africa is advocating for stronger protection measures for the local steel industry against imported steel. While a provisional safeguard duty of 9% has been implemented on certain hot-rolled steel products, the company is pushing for a higher duty of 25%, arguing that this level is justified based on similar protections implemented in other countries to safeguard their steel industries.
JSE: ACL
Price: ZAR 1.20
Change: - 4.8%
The stock is currently in a downtrend, having broken below its 50-day moving average of ZAR 1.35. The MACD indicator shows a bearish crossover, suggesting potential further downside. Support levels are seen at ZAR 1.10 and ZAR 1.00, while resistance is at ZAR 1.30. The Relative Strength Index (RSI) is approaching oversold territory, indicating a possible short-term bounce. However, the overall technical picture remains bearish, with the stock trading below both its 50-day and 200-day moving averages. Traders should watch for a potential trend reversal only if the stock can break above the ZAR 1.30 resistance level on strong volume.
