Menu

Operational review

Manufacturing and Processing



Aveng Steel supplies a wide range of products and services to the southern African construction, mining and automotive industries from its steel processing centres and manufacturing plants; and supplies fabricated products for structural applications from its Vanderbijlpark plant.


52% improvement in AIFR    
     

Aveng Steel operations

 

Hercu Aucamp Managing Director

 
Sectors served
  • Infrastructure
  • Mining
  • Power
  • Industrial
  • Commercial
  • Automotive

Aveng Steeledale and Aveng Steel Fabrication both achieved a turnaround to profitability


Aveng Steel was formed on 1 July 2013 when the Aveng Group's steel businesses were combined into one operating group to leverage their collective value. Aveng Steel comprises Aveng Trident Steel, Aveng Steeledale and Aveng Steel Fabrication.

Aveng Steel operated in extremely challenging market conditions during the year under review. Lower demand from the construction industry in a generally weak economy was compounded by industrial action in the automotive, construction and mining sectors along with high levels of competition. The situation was further exacerbated by general overstocking in the industry.

Operating performance

Aveng Trident Steel

Aveng Trident Steel, a steel merchant and processor and the largest revenue contributor to Aveng Steel, was heavily impacted by two major setbacks during the first half of the financial year. A fire caused extensive damage to the ArcelorMittal steel plant in Vanderbijlpark in February 2013, causing a three-month shutdown of the facility and forcing its customers to import steel. The timing of the imports coincided with the reopening of the ArcelorMittal facility in mid-2013, causing overstocking and placing further pressure on volumes and profit margins in the steel industry. In mid-August, a seven-week strike commenced in the automotive industry, a strategically important market for Aveng Trident Steel.

In the second half of the financial year, the steel industry remained weak as a result of overstocking in the first half and, despite a marginal improvement in prices and some stabilisation in inventory levels, low demand and intense competition maintained downward pressure on the industry, forcing an increase in steel business liquidations.

Cost associated with labour disruptions amounted to R43 million (2013: R19 million).

Aveng Steeledale

Aveng Steeledale, a supplier of beneficiated steel reinforcing bars and mesh for concrete structures, recorded significant losses in the 2013 financial year as a result of low demand, very competitive pricing in an already embattled industry and internal financial control weaknesses. Although demand for mesh products increased in 2014, challenging conditions persisted as domestic demand for infrastructure projects remained weak and competitive pricing and fixed-price contracts eroded profit margins.

The primary focus for Steeledale during the first half of the financial year was to restore fundamental business practices, including financial controls, and achieve a turnaround in profitability. A restructuring of the business resulted in a significant reduction in headcount and other direct and indirect costs. Stronger emphasis was placed on leveraging Steeledale's competitive advantages of geographic spread and experience in managing construction sites.

Aveng Steel Fabrication

Steel Fabrication, a fabricator of structural steelwork and other industrial products, targets large projects in major industries. The contract to supply fabricated steel to the Medupi and Kusile power stations proceeded according to plan and will continue through the second half of the 2015 financial year. A number of projects in the mining and renewable energy sectors were completed during the year. Low levels of demand for infrastructure development and the depletion of work on hand impacted the business unit's financial performance and measures were applied in the second half of the financial year to reduce costs and secure additional work.

Key focus areas

Financial performance

The financial performance of Aveng Steel was heavily impacted by subdued activity in its key markets resulting in a 4% decline in revenue to R7,2 billion.

The profit margins of Aveng Steel declined as marginal price increases and foreign exchange benefits did little to offset the impact of labour disruptions and lower demand in the industry.

The benefits of integrating the three businesses began to materialise during the year and interventions to rightsize Aveng Steeledale and Aveng Steel Fabrication resulted in additional cost reductions. As a consequence of these actions, Aveng Steeledale achieved a turnaround and delivered a net operating profit in the second half of the financial year. Cost-cutting measures combined with improved productivity on some projects enabled Aveng Steel Fabrication to return to profitability.

A historic claim against Genrec for a sub-contract to supply fabricated steel to Medupi and Kusile proceeded to arbitration in August 2014.

 
 

Aveng Steel's contribution to
the Group's revenue

Aveng Trident Steel will continue to focus on diversifying its revenues and strengthening its profit margins by increasing its branch network in South Africa, increasing value added products and maintaining its focus on operational efficiency improvements.

 
 
Working capital management

Improving working capital management remains a key focus area for Aveng Trident Steel, which experienced an increase in inventory levels due to low product demand as a result of labour disruptions in the construction and automotive markets. Inventory levels reduced during May and June 2014.

Aveng Trident Steel implemented a new SAP ERP system during August 2013. This will improve working capital management in future.

Aveng Steeledale increased its focus on receivables management.

Operational efficiency

To mitigate the impact of volatility in the steel industry, Aveng Trident Steel has, for a number of years, balanced a strong internal focus on continually strengthening its capacity and efficiencies, with an external initiative to drive growth by diversifying its market, product range and geographic footprint.

Much of the focus of Aveng Steel has been on integrating the three businesses and leveraging the synergies between them. Procurement and support functions were centralised during the year, resulting in cost benefits, sales functions were rationalised and the businesses are all benefiting from knowledge transfer.

Capital expenditure of R117 million for property, plant and equipment and R66 million for intangible assets was incurred to fund projects to strengthen processing capacity and service delivery in the regional branches. These include the commissioning of a tube laser and a peeling machine / spring steel-processing facility in Roodekop; and the installation of a new cut-to-length line for the KwaZulu-Natal operation. The new SAP enterprise resources planning system which went live in August 2013 also contributed to a significant improvement in the efficiency of data management and internal business processes.

Geographic expansion

Aveng Steel has a footprint in all nine South African provinces and continues to strengthen its regional network of branches in South Africa. The business unit also extends all of its offerings beyond the domestic market to southern Africa where it is represented in Zambia, Namibia, Lesotho, Mozambique and Swaziland. Aveng Steeledale established a presence in Maputo in 2014 to serve increasing demand for its products in Mozambique.

Market expansion in the rest of Africa has been negated by delays in the award of mining-related contracts in Tete province, Mozambique.

Safety and environment

A strong focus on safety enabled Aveng Steel to achieve an LTIFR of 0,3 (2013: 0,4), after recording consistent annual improvements in recent years. The AIFR was 5,1 (2013: 10,6).

Looking ahead

The steel industry is expected to remain under pressure in 2015, with no significant improvement in prices or demand anticipated in the current economic environment. The steel sector labour disruptions in July 2014 will have a notable impact on the first half of the 2015 financial year.

Aveng Trident Steel will continue to focus on diversifying its revenues and strengthening its profit margins by increasing its branch network in South Africa, adding value added products and maintaining its focus on operational efficiency improvements.

Aveng Steeledale will focus on strengthening its distribution network and maintaining a lower cost base. The business will benefit from an increase in infrastructure investment.

Aveng Steel Fabrication will focus on a continued turnaround of its operations and achieving sustainability by reducing fixed overhead costs and securing more viable work.