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ArcelorMittal eyes special tariffs from Eskom

Steel maker shows first profit this decade.

The share price of steel maker ArcelorMittal increased by almost 4% by mid-afternoon on Thursday to R3.65, after the group announced its first profit this decade.

In the year ended December 31 ArcelorMittal managed to increase revenue by 16% and improved its earnings before interest, tax, depreciation and amortisation (Ebitda) from a loss of R315 million to a R3.6 billion profit.

This excludes the income from the sale of Macsteel in which the group had a 50% stake. The income was utilised to reduce net debt from R3.2 billion to R475 million.

ArcelorMittal CEO Kobus Verster told analysts at the group’s results presentation that the improved results were largely because of stronger international prices and increased sales volumes.

The local steel market remained subdued, with a 4% decrease in local steel consumption, but steel demand and steel prices in China, Europe and the USA improved, Verster said.

Markets in Africa, especially East Africa, performed well on the back of investment in road, rail and infrastructure investment, he said.

Imports still a threat 

Imported products however remain a threat in South Africa and the rest of the continent. Imports, which are mainly from China, reduced by 20% locally in the reporting period, but still amounted to 769 000 tons of primary carbon steel. This despite some protective measures instituted by government.

Verster said ArcelorMittal is constantly engaging government about the matter and has a good relationship with the departments of trade and industry (dti) and economic development.

The group is eyeing a target of $50 per ton savings by 2021 and says it is already making good progress by removing bottlenecks at its plants. This could amount to R3 billion in savings per annum, Verster said.

There is however a risk that sharp increases in electricity tariffs and other administered prices like rail and port costs could nullify those gains.

Verster said ArcelorMittal is in the process of submitting applications to Eskom for special pricing arrangements for its four plants, situated in Vanderbijlpark, Vereeniging, Saldanha and Newcastle.

Moneyweb previously reported that energy regulator Nersa had approved special pricing arrangements for two of Eskom’s industrial clients. Silicon Smelters and Sublime Technologies were granted discounts on their electricity tariffs for a limited period of two years, on condition that they consumed a specified volume of electricity. These approvals were given in 2017 and 2018 respectively.

The approvals were given on the basis of the companies being in distress. The aim was to save jobs and contribute to Eskom’s fixed cost while utilising some of its excess capacity.

Read: Eskom working on tariff suite for energy-intensive users

Silicon Smelter CEO Nellis Bester confirmed to Moneyweb last year that the plants are once again operating at full capacity after the implementation of the tariff discount. He said 200 direct job opportunities and more than 3 200 indirect job opportunities have been restored following the tariff approval by Nersa.

These two approvals were given in terms of an interim short-term framework.

In the meantime government has finalised its framework for such short-term negotiated pricing agreements and Eskom has so far received five applications from large users, including some from ArcelorMittal.

The new framework still provides for a two-year period and is aimed at businesses that are in distress.

During the public hearings Nersa held about Eskom’s application for annual tariff increases of more than 15% for the next three years, stakeholders complained that it took at least two years to get approval for the first two agreements.

Verster said he hoped to have an answer within three months, in light of the fact that the new framework has been approved.

It has to be noted that Eskom’s power stations are seriously underperforming, with an energy availability factor of little more than 60%. The result is a constrained supply and it is not clear how Eskom and Nersa will factor that into the consideration of the applications.

Another factor mentioned during the public hearings is that Eskom’s tariffs for large power users are structured to cross-subsidise other customers. There is therefore a risk that special pricing agreements with these industrial clients could result in a shortfall in revenue that would necessitate an increase in the cost of electricity for other customers.

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How does a foreign owned steel company that relies on import parity pricing to screw domestic steel customers have the gall to request special electricity pricing from eskom at the same time as eskom was load shedding?

They can’t even get import parity pricing right. I’ve seen projects where completed steel products land in cape town CIF for less than what eskom would charge the local manufacturer for the steel only. The local manufacturer showed me the quotes as we wanted high local content.

I guess they want to be compensated for all the red tape and LRA hassles.

For hassles, Perhaps somebody should go take a close look at the 8,000,000,000 per year of related party purchases transactions (and less than R50m of sales transactions). Are these long or short or hairy arms length transactions?

Enough other large industrial companies (bmw, mercedes, vw, sa breweries, etc etc) cope fine with what I agree is a lot of red tape and burdensome labor regulations.

We have a lot of domestic value add in the steel product manufacturing sectors. Despite the fact that they can land imported steel here cheaper than what our producers and merchants want to charge, our producers and merchants report very poor results. Puzzle

End of comments.





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