Management reviews > Review of operations

 

1: High carbon steel round bar being cut to length, 2: High forming quality thin gauged sheet being fed from a cutto- length line into a sophisticated press feed line for further processing, 3: The multi-head profile gas cutters in the process of slitting a certified plate to width for the manufacture of plate girders, 4: A cold saw about to cut a structural section.

     
  2009  
Rm  
2008  
Rm  
Revenue   4 764,1   5 334,1  
Capital expenditure   130,5   82,9  
Major markets   Southern Africa   Southern Africa  
Employees   1 710   1 777  

  • Revenues declined by almost 11% to R4,8 billion.
  • Significant decrease in average steel prices and a 29% reduction in volumes.
  • Inventories successfully aligned to lower demand.
  • Demand expected to flow from construction of Medupi and Kusile power stations.
  • Increased demand from OEM manufacturer for vehicle export market.


Operating environment

The beginning of the financial year was characterised by increasing steel prices, insatiable demand for raw materials and a shortage of steel due to power and supply constraints. Steel mills around the world were experiencing capacity restrictions because of the global demand, especially from China. In order to secure sufficient supply to satisfy their customers’ requirements, steel merchants purchased all available stock, resulting in record inventory levels within the supply chain.

Market participants were taken by surprise when the steel market turned overnight in August 2008 with global demand collapsing in the wake of the economic crisis and steel prices going into free fall. The global economic meltdown led to a 21% reduction in global volumes while internationally prices came down by as much as 60%, forcing the industry to take significant stock writedowns. This was compounded by high stock levels which had been built up in anticipation of sustained growth and which merchants were forced to sell at the lower ruling prices, significantly eroding their margins.

In addition, price reductions in the markets serviced by Aveng contracted materially, with some segments down by more than 30%. In response, it has focused on reducing stock holdings to manage cash flow in order to mitigate the trend of aggressive destocking among customers who had been increasing their own stock holdings during the boom.

No sector has been immune from the downturn, with lower volumes in all steel segments including construction, automotive and the export markets. Subdued activity in the mining sector exacerbated the market conditions.

In an attempt to reduce excess stocks in the supply chain, steel mills around the world decreased production. This created artificial shortages in the market, especially for specialist products as the mills produced these intermittently, resulting in supply interruptions. With the improved price stability after year-end, steel mills recently restarted capacity in order to catch up on order backlogs.

In South Africa, the automotive industry came under further pressure during the year and new vehicle sales decreased by 23% year-on-year in June 2009. According to NAAMSA, average motor vehicle assembly industry capacity utilisation levels declined to record lows for all automotive manufacturing segments. However, ongoing capital investments by manufacturers provides evidence that the longer-term outlook for the local industry remains positive.

Towards the end of the financial year, the steel market started recovering, with volumes showing a steady recovery of about 10% each month and the first price increases coming through in July 2009. However, the positive trend will need to persist for several months to confirm a sustainable recovery as these improved volumes could merely be an indication that depleted stocks are being replenished in the supply chain.

Safety

Trident Steel had zero fatalities for the year under review, a substantial improvement from three in the previous year. It is dedicating additional resources to ensure that it continues to meet Aveng’s commitment of zero fatalities. The operating group made progress with its initiatives to implement an integrated SHE system and improve the effectiveness of its near-miss programme, resulting in a substantial improvement in DIFR to 1,07 in June 2009 from 2,26 a year ago. Trident Speciality Services and Trident Steel Cape Town both achieved the significant milestone of a zero DIFR for the year under review.