South African steel manufacturer Mittal Steel on Wednesday reported a decline in diluted headline earnings per share to 1 041 cents for the year ended in December 2006 from 1 137 cents a year earlier. Basic HEPS were 1 042 cents from 1 139 cents before. The group declared a final dividend of 204 cents per share, up from 140 cents a year ago. Together with the interim dividend, the total dividend amounted to 347 cents compared with 380 cents a year ago.
Revenue grew to R25,36-billion from R23,98-billion a year ago, while headline earnings were down 8% to R4,65-billion, mainly due to a significant increase in the cost of input materials, which was partially offset by an increase in domestic sales volumes and a weaker rand-dollar exchange rate, the company said.
The group said headline earnings for the fourth quarter decreased by 14% compared with the previous quarter mainly due to the seasonal slowdown in sales during the December holiday period. However, compared to the corresponding quarter last year, headline earnings increased by 45% driven by higher domestic sales volumes and an increase in international steel prices.
Operating profit — at R5,83-billion — was down 16% from the previous year’s R6,89-billion.
Flat products declined by 21% and Coke and Chemicals by 39% while long products remained in line with the previous year.
The main reasons for the decline in operating profit for flat products compared to a roll-over for long products were a higher increase in the cost of input materials, especially the price increase of zinc, used in galvanised flat products and imported iron ore pellets for Saldanha Steel.
Production interruptions also impacted more severely on the operational stability of the flat product plants. Average selling prices, compared to 2005, were also higher for long products than flat products.
The decline in operating profit for the Coke and Chemicals business was largely due to a sharp decline in the international market coke price.
Liquid steel production for the year of 7,055-million tonnes decreased by 3% year-on-year, due to several production disruptions. These included a skip-hoist failure at one of the blast furnaces at Vanderbijlpark Steel, electricity and oxygen supply outages at Saldanha Steel, two fire incidents at Vanderbijlpark Steel and a cut-back in production, both at Vanderbijlpark Steel and Newcastle Steel, necessitated by a lack of iron ore due to delivery problems.
The group said global steel consumption increased by 9% to about 1,12-billion tonnes during 2006, driven by the expansions in the eurozone countries and Japan while rapid growth continued in China and India.
“Of concern is the growing output of China which now represents more than a third of total world steel production. It is, however, encouraging that China’s National Development and Reform Commission aims to bring about restructuring of the greatly fragmented industry and to phase out outdated production capacity,” the group commented.
China was a net exporter of 24,5-million tonnes of finished steel products during 2006. Based on current trends, China’s net export position is expected to decline during 2007, it said.
Export volumes decreased by 35% during 2006 due to higher domestic demand.
The lower volumes available for exports created the opportunity to withdraw from less attractive markets which in return also impacted positively on average export prices achieved, it said.
South Africa’s domestic demand during the year was very strong and increased by 26% compared to the prior year. Preliminary numbers issued by the South African Iron and Steel Institute (SAISI) indicates a record apparent annual domestic steel consumption of 5,8-million tonnes for 2006, which is 10% higher than the previous record set in 1981. It also represents an increase of about 27% over 2005.
Of significance is that steel consuming sectors related to the automotive, furniture and appliances and other durable goods did exceptionally well.
Demand for steel was further driven by the need to alleviate infrastructure bottlenecks which developed on the back of solid economic growth. The growth in the construction sector was approximately 14% for 2006. The depreciation of the rand also supported the manufacturing sector by being more competitive in the export market while increasing the scope for domestic production to replace value-added imports.
Cash cost per tonne of hot rolled coil and billets increased by 10,3% and 8,8% respectively, compared to last year, driven by substantial increases in the cost of metallurgical coking coal, imported iron ore pellets, tin, nickel, aluminum and iron ore. The cost of hot rolled coil was further negatively impacted by the production disruptions at the flat product plants.
The cost of galvanised material increased by 36% compared to last year due to the higher cost to produce hot rolled coils and an 131% increase in the price of zinc.
The group noted that an alternative dispute resolution meeting was held with the South African Revenue Service (Sars) on December 1 2006, regarding the disallowance of the tax deduction of the payments made in terms of the Business Assistance Agreement.
The full amount at risk is R403-million of tax plus interest. Although Sars still has to respond to the outcome of the proceedings, it was considered prudent to provide for 20% of the tax amount.
In the case at the Competition Tribunal on alleged excessive pricing brought by the gold miners Harmony and DRD Gold, closing arguments were presented at the end of November 2006, with a ruling expected towards the end of March.
“We maintain our view, based on advice from senior counsel that no significant exposure exists in this regard. No provision has been raised and no contingent liability quantified in respect of this and other subsequent complaints, referred to the Competition Tribunal, after year end,” it said.
Looking ahead to the first quarter of the 2007 financial year, Mittal said international steel prices are expected to be stronger backed by a balance supply and demand environment, high cost pressures and improved supply discipline.
Domestic demand is set to increase further, ahead of the government’s multibillion infrastructure development programme. This includes the expansion of the electricity system, the upgrade and construction of new rail infrastructure and the refurbishment and building of stadiums for the Soccer World Cup.
It is expected that the results for the first quarter of 2007 will improve compared to quarter four of 2006, mostly driven by higher domestic sales volumes, it concluded. – I-Net Bridge