ArcelorMittal South Africa H1 dives, sees tough Q3

Higher input costs and a strong rand led to a 63 percent drop in ArcelorMittal South Africa's first-half profit and the steelmaker forecast a difficult third quarter on Wednesday, sending its shares to a 28-month low.

Weakening demand and persistently high input costs have been pressuring steelmakers globally, along with tightening monetary policy in China and debt problems in Europe and the United States.

ArcelorMittal South Africa, a unit of the world's top steelmaker, said it expected earnings for the third quarter to be "substantially lower" compared with the previous three months.

"International steel prices are clearly coming under pressure and although raw material prices may start to ease ... our input costs for the next quarter will be higher than the second quarter as a result of the contracting approach that is used for coking coal and iron ore," Chief Executive Nonkululeko Nyembezi-Heita said during a presentation.

She added that results would also be hit by a recent strike in the steel industry and a planned shutdown at its Saldanha Works operation, which is expected to last for 40 days.

Shares in the company were down 6.7 percent at 69.20 rand by 1300 GMT after touching a low of 66.99 rand earlier in the session, the lowest since March 2009 and the biggest one-day fall in over a year.

"Shareholders may be bullish on the fact that demand for steel and the steel price are going to increase in the long term, but I think increasing costs that are facing this company locally are going to offset any increase in the steel price," said Byron Lotter, an analyst at Vestact.

RISING COSTS

ArcelorMittal South Africa said diluted headline earnings per share for the six months to the end of June fell 63 percent to 166 cents. Headline earnings are the main profit gauge in South Africa and strip out certain one-time items.

First-half revenue rose to 16.6 billion rand, compared with 16.2 billion the previous year.

The company, which sells 90 percent of its steel in Africa, produced 3.08 million tonnes of steel during the six months.

Earnings were hit by a 59 percent rise in the cost of coking coal, a 23 percent increase in iron ore prices and a 28 percent jump in the cost of electricity.

To mitigate the impact from further increases, ArcelorMittal South Africa is exploring the option of sourcing coking coal from Mozambique and is planning to invest in an iron ore source in South Africa's Northern Cape province, which could supply it with between 1 to 2 million tonnes of ore.

ArcelorMittal has been at loggerheads with Kumba Iron Ore, a unit of Anglo American, over iron ore prices since February last year and the case will go to an arbitration hearing in May next year. The case will decide if the steelmaker can continue sourcing iron ore from Kumba at a discount.

The unit is also investing heavily in electricity projects, hoping to reduce its reliance on power utility Eskom and steep increases in power tariffs expected for the next few years.

The company declared an interim dividend of 55 cents.