Catastrophe at ArcelorMittal – the Longs business is being shut down (JSE: ACL)

The impact on areas like Newcastle and Vereeniging will be severe

Remember when the ArcelorMittal share price jumped based on the announcement of stimulus in China? The share price has done crazier things than a heart monitor strapped to someone on a rollercoaster, as you can see below:

Those who made money in the chaos of October were very lucky and those with short positions were hammered. Anyone who was brave enough to be short in the aftermath of that squeeze has now made money from a sudden 31% drop in the price as the news broke of the Longs business finally being shut down.

The effect of this goes far beyond the share price. Many lives are being impacted here in economically vulnerable areas where alternative employment is hard to come by. There are 3,500 direct and indirect jobs that may be affected, with knock-on impacts for those households and the businesses that service them. ArcelorMittal has been warning for a while that this day could come, with efforts throughout 2024 to try and save as many jobs as possible and create a sustainable future for the business. Despite the efforts, including from government, the structural problems in the industry and an ongoing deterioration in global conditions have now made it necessary for ArcelorMittal to pull the plug.

Things will move quickly now, with the wind-down of production expected to be complete in the first quarter of this year. There are nuances of course, like an expected continuation of Newcastle’s coke-making operations. Overall, there is no time to waste, as the muted market response to Chinese stimulus has seen steel prices return to low levels, punished by the extent of Chinese exports that have been flooding global markets. There’s a shocking statistic that ArcelorMittal includes in the announcement to drive the point home: since 2018, steel exports from South Africa are down 40% and imports are up 50%!

Against this backdrop, it doesn’t sound so bad that ArcelorMittal’s revenue is expected to be down “only” 5% in 2024 vs. 2023. The problem is that with such a high fixed cost structure (i.e. the level of operating leverage in the group), this revenue drop is a financial disaster that leads to huge losses. You know the saying of revenue dropping to the bottom line? Well, the loss of revenue also drops to the bottom line in a business like this – just in the other direction.

Although this isn’t reflective of the cash charges, it’s worth noting that the expected cost of asset impairments, wind down and severance charges is R2.7 billion. They don’t give cash guidance in terms of the costs, but ArcelorMittal is obviously working with lenders to ensure that the balance sheet is sustainable going forward.

Note that the words “potential recapitalisation” have reared their ugly heads. This usually means that a rights issue could be coming down the line, if equity holders need to chip in to keep the bankers happy.

With the headline loss per share expected to worsen from R1.70 per share to between R4.06 and R4.41 per share, ArcelorMittal has become an even riskier play. It’s been speculative for a long time now and is a reminder of how dangerous these trades (otherwise known as gambles) can be.

Here’s a chart that may truly shock you:

Nibbles:

• Director dealings:
  • A director of PBT Group (JSE: PBG) bought shares worth R420k.

• There’s an awkward start at Cilo Cybin Holdings (JSE: CCC), where results for the six months to September 2024 have suffered an “unforeseen” delay and will only be released on 14 January.

• Salungano Group (JSE: SLG) has withdrawn the cautionary announcement related to business rescue proceedings at Keaton Mining. This is because agreements with suppliers and a management agreement in terms of the section 155 compromise proposal have been finalised, so production at Vanggatfontein has recommenced.

• A couple of Powerfleet’s (JSE: PWR) subsidiaries increased their facility with a bank from $10 million to $20 million. Although this isn’t exactly big news, it shows that the balance sheets of those entities must be in decent shape if banks are willing to increase facilities.

• The chairman of Oando (JSE: OAO), whose official title is very colourful (His Royal Majesty, Oba Adedotun Gbadebo, CFR, the Alake of Egbalan), has stepped down as chairman and retired as a board member. The new chairman is Mr. Ademola Akinrele, SAN – a far less dramatic business card.

• Sail Mining Group (JSE: SGP) has withdrawn the cautionary announcement related to a subsidiary of the group. Although this technically means that “shareholders don’t need to exercise caution” when trading in the shares, the challenge is that the shares are still suspended from trading!