Iron Ore agreement brings relief to ArcelorMittal SA

Steel markets remain fairly depressed but JSE listed steel manufacturing giant, ArcelorMittal South Africa, is looking forward with less anxiety. The anxiety trumping card is the iron ore supply agreement signed with Kumba this week.

ArcelorMittal also released this week its financial results for the quarter ended September reflecting healthier numbers when compared to the 2012 loss making situation.

Headline earnings for the quarter increased to R199 million compared to the R168 million headline loss reported in the 2012 comparable quarter. The headline earnings were 35% higher than the preceding three months. Revenue increased by 15% to R8.8 billion. This was attributed to 11% rise in average steel prices.

ArcelorMittal has had tough time over the past few years following a dramatic decline of steel demand around the globe which was to depress prices. This conspired with rising operating costs and sunk ArcelorMittal into the red in 2012. The loss of ArcelorMittal’s claim to the Sishen Iron Ore mine in the Northern Cape did not help the situation. ArcelorMittal, which developed on the back of cheap iron ore supply, had to pay much more than it was to, as a result of Kumba’s claim that ArcelorMittal had lost its rights over the Sishen mine.

ArcelorMittal South Africa’s CEO Nonkululeko Nyembezi-Heita said “Within the context of still fairly weak domestic trading conditions, our financial performance was encouraging. I’m pleased with the stability in our operations this past quarter, during which we’ve also been able to operate at relatively high levels of capacity utilisation, which were above 80% across all the units”.

The company’s market review shows trading conditions remain challenging. “Trading conditions continued to be challenging for steel producers globally,” said the company.

“Although there was no firm trend emerging over the past quarter, there were hopeful signs of some stabilisation in Europe. China managed to achieve a soft landing, which bodes well for the global economy. International steel prices improved somewhat, tracking the upward trend in raw material prices.”

The company added that the “South African economic growth is tracking below expectations with the trade balance remaining unfavourable despite the weaker rand. More pertinently for the steel sector, slow implementation of infrastructure development projects and the low level of fixed investment in the mining sector continued to hamper growth.”

On the positive side, the softening in the rand exchange rate provided a strong underpin to our export sales.”

The company is cautious about the outlook. “Domestic sales are expected to be significantly lower, largely due to the normal seasonal slowdown and general weakness in the domestic market. Accordingly, earnings are expected to be lower than the preceding quarter.”

About the agreement with Kumba Iron Ore Nyembezi-Heita said “This is a very positive development for ArcelorMittal South Africa and Kumba.”

The scope of the new agreement is broad, incorporating iron ore supply from both Sishen and Thabazimbi. The importance of the new arrangement for us is that it resolves all ongoing disputes with Kumba, results in more favourable prices than we currently enjoy and provides long-term security of supply for a key raw material input.”

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