JOHANNESBURG (Business Day) -- Mittal Steel SA, 52%-owned by Arcelor Mittal [NYSE:MT], will try this year to curb the need to import steel, but it may not be able to do so in the face of surging growth in local demand for steel and while the group is in the middle of a R9 billion ($1.27 billion)-production expansion programme.
Last year South Africa had to import 550,000 tonnes of liquid steel - 60% up on steel imports for the previous year - as unprecedented growth in demand combined with capacity constraints by local producers saw the country run low on steel supplies. Mittal's part of that was marginal as the group imported 135,000 tonnes of slab to compensate for a shutdown to reline its Vanderbijlpark blast furnace.
The relining in the second quarter of Mittal's Newcastle blast furnace, part of its R9 billion ($1.27 billion) capital expenditure programme to boost production, meant it would lose about 400,000 tonnes of liquid steel production. Mittal would have to import more than 300,000 tonnes of billet, CEO Rick Reato said.
Mittal is sourcing product from within the broader Arcelor Mittal group, but this comes at marketrelated prices to the local company. According Reato, the group is still negotiating price with its parent.
Mittal yesterday posted revenue growth of 6% to R25.3 billion ($3.58 billion) for the year to December.
Operating profit declined 15% to R5.8 billion ($820,800), due mainly to production interruptions and higher input costs, especially zinc, which surged 131% in the past year, on top of a 32% rise in 2005, Reato said.
Liquid steel production for the year declined 3% to 7,055 million tonnes as Mittal suffered production disruptions last year, caused in part by factors outside its control, such as power outages in Western Cape and inadequate rail transport.
The decline in profit was, however, partially offset by the surge in domestic demand - which also meant Mittal could withdraw product from the less attractive Asian market - and a weaker rand.
Headline earnings fell 8% to R4.6 billion ($650,900) but on a six-month comparison earnings in the second half were 43% ahead of the first half's, and were set to remain strong on the back of continued surging local demand, said CFO Kobus Verster.
Domestic demand was strong during the year, with preliminary numbers from the South African Iron and Steel Institute indicating record domestic steel consumption of 5.8 million tonnes for the year, which was 10% higher than the previous record set in 1981.
A dividend of R204 cents a share was declared, bringing total dividends for the year to R347 cents, compared with R380 cents previously.
Higher international steel prices and continued strength in the domestic market are set to boost the group. Reato expects results for the first quarter this year to be better than the previous quarter's.
Mittal is still at loggerheads with the South African Revenue Service (SARS) over tax deductibility of its controversial business-assistance agreement with its parent company.
The amount at risk is R403 million ($507 million) in tax plus an interest charge. While Mittal awaits a response from SARS after a meeting in December, it has made provision of 20% of the tax amount. Mittal yesterday shed 1.67%, or R200 cents, to close at R117.50 ($16.63).
BEE Compliance
As one of the top 40-ranked corporates, Mittal Steel SA seemed awfully quiet on one of the really big imperatives on big business these days: black economic empowerment (BEE).
Especially on the equity part of the BEE codes, Mittal seem to be in a bit of a pickle. With the steel market having moved significantly in recent years, an empowerment deal would be pricey. Furthermore, no obvious, big empowerment players in the sector the group could potentially partner with in an empowerment deal spring to mind.
Institutional investors at the group's results presentation were concerned about the group's empowerment status. The issue came up more than once.
However, one important fact seems to be escaping many.
Mittal is 52% foreign owned and as such the group would qualify for allowances made to multinational companies in the BEE codes.
This means it could effectively steer away from the equity requirement of the codes and make up those points by upping the ante on other aspects of the BEE legislation, like employment equity and procurement.
And Mittal's empowerment status on these fronts look surprisingly good. It last year spent more than R1 billion ($141.5 million) on procuring goods from BEE suppliers and at executive level it has made good progress in transforming the group.
CEO Rick Reato admits that Mittal is still struggling somewhat at senior management level but says it is bringing people through middle management ranks that will in good time also make the composition of senior management look good from an employment equity point of view.
