David Shapiro’s expert analysis: ArcelorMittal and economic reform for SA

David Shapiro from Sasfin joined Alec Hogg on CNBC Africa’s Power Lunch to share expert insights on the latest in today’s markets. Ā 

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Letā€™s start with ArcelorMittal. When Piet Viljoen of RECM, a deep value investor gives up hope, is there any hope left?

I looked at the market capitalisation, after those results came out, theyā€™re still making losses, which is a bad sign, even though they have reduced it.Ā  I think we need to look at the numbers a little more carefully to establish how trading is going.Ā  I donā€™t think it is going well but that market cap today is R11bn.Ā  This was one of South Africaā€™s biggest industries.Ā  R11bn is the size of Super Group and itā€™s the size of Famous Brands, so it gives you an idea of how poor profits and how this company has fallen from being a leading industrial company, to where it is today.Ā  I donā€™t even think it makes the top 60/70 of top capitalised companies on the JSE.

It most definitely doesnā€™t.Ā  It is way outside of that and down 37 percent in the past year.Ā  It was interesting what Piet Viljoen said yesterday, because he is a deep value investor, so heā€™s looking for those stocks that will improve.Ā  He reckons heā€™s sticking with platinum, and resource shares, but when I asked him for a mistake that heā€™s made, he said, ArcelorMittal was one of them. Ā If a deep value investor is now losing confidence in your ability to turnaround, who would have confidence?Ā Ā Ā Ā Ā 

Iā€™m not sure who and the one thing that worries me globally, and more so in South Africa, is that as the oil price falls projects are pulled back.Ā  As commodity prices fall, expansion is pulled back, so weā€™re not digging holes or weā€™re not making factories.Ā  We are very circumspect about expansion and therefore how will that affect the demand for steel?

If you look at Sandton, youā€™d say the demand for steel has got to be going through the roof with all these new buildings.Ā 

Yes, but whoā€™s going to occupy them?

Well, Discovery, Webber Wentzel – services businesses.

Yes, but it moves from one office to another.Ā  Who then occupies the office of which they had?Ā  Thatā€™s what worries me.Ā  I was even looking through the Redefineā€™s results and the vacancies in the office are increasing, up to 11-odd percent, so Iā€™m concerned about that.Ā  I think these decisions are made well ahead of the actual building of these buildings.

So ArcelorMittal…

I’m reluctant… You asked me that question what about Libya and all these countries as they start to put more oil on.Ā  Iā€™m still cautious about that and Iā€™m cautious about the amount of iron ore thatā€™s coming onto the market.Ā  We had a wonderful day in resources yesterday, against a background where the iron ore price is $62.00 a ton, which is the lowest weā€™ve since seen before the financial crisis.

And sliding unfortunately.Ā 

Yes.

Just to look at ArcelorMittal and its fall from grace.Ā  Three years ago, it was a stock that many people thought that even then, at R65.00 a share, was offering some kind of value.Ā  Today itā€™s at R25.00 a share, and before those three years, it was even higher than that.Ā  Piet is going shy of it, even at R25.00, itā€™s not an opportunity.

You might have the Telkom effect, where it is so low that people come in and buy it but youā€™re buying it on the hopes of a bounce.Ā  You are not buying it because the outlook is rosy.

What happens to the people that works for ArcelorMittal, all my old friends from Newcastle?Ā 

Theyā€™re probably concerned and very worried about their jobs.Ā  I think like most people in the manufacturing industry here.Ā  Youā€™re not quite sure what tomorrow brings.Ā  Things are very tough.

The CEO, Nkululeko Nyembezi-Heita, left there.Ā  She is now the Chairman of the Johannesburg Stock Exchange. Sheā€™s very astute.Ā  She might have thought that even she canā€™t get it right, ā€˜so move onā€™.Ā  How does that work David, when youā€™re sitting at the top?

I donā€™t know.Ā  I donā€™t think South Africa helps them either.Ā  I think you need an economy thatā€™s going to help you.Ā  With the Ford story, we have so many structural issues here that are holding us back, which need to be addressed.Ā  Johann Rupert let off yesterday, at the Heritage Foundation, giving his views on this economy.Ā  He was saying that the Trade Unions are bringing us down and things have to be done there.Ā  We have to revise Labour Policy.Ā  We have to address many issues here to help manufactures.Ā  My big fear is that motor manufacturers, who make up a big part of our manufacturing industry, will also start to feel the noose tightening around them, as things and conditions here start to deteriorate and more demands come from the Trade Unions, such as higher wages.Ā  Iā€™m a little concerned about where weā€™re heading in this economy.

I had a very interesting interview yesterday with Jeff Nemeth from Ford, who said that when he goes to Dearborn (their Head Office in the U.S.), there is warmth towards South Africa and a desire to put more money into South Africa because it is much easier to manufacture on the Continent and export into Africa, but there are issues that are raised every time.Ā  He said in his last meeting, he spoke about the obvious ones, power from Eskom, Labour Legislation, and generally the political stability in the country.Ā 

I donā€™t think thereā€™s a desire to work hard here.Ā  I think thereā€™s still a very strong attitude of entitlement and that we see in our labour, and you canā€™t understand that with 25 percent of our labour force or of our adults unemployed.Ā  Iā€™m concerned that one day someone is going to say, ā€˜hold on a second, it is much easier to produce somewhere elseā€™. Ā The biggest worry in manufacturing today is robotics.Ā  Replacing labour with machines.Ā  They do the job much more efficiently and 24 hours a day and I think weā€™re seeing huge advances, particularly in the motor industry.Ā  In fact, I think in India, I think Tata has a plant, which is 80 percent robotic, so thatā€™s the threat, if we donā€™t tackle labour.

My best story was sitting and listening to Matteo Renzi, the Prime Minister of Italy.Ā  He said, ā€œHere I am, a 40 year old man,ā€ heā€™d actually turned 40 the week before, (this was only two weeks ago in Davos) and he said that, ā€œIā€™ve been appointed as Prime Minister because no one else really wants the kind of job that the whole of Italy knows we need to do.Ā  For 20 years weā€™ve had inflexible labour legislation.Ā  The country has not grown in 20 years, so our Government debt is up threefold, now we have to fix it.Ā  Weā€™ve got to fix labour legislation and that is unpopular.Ā  You need a Cyril Ramaphosa to grasp the nettle and say, ā€˜for once, let economics overcome the partiesā€™.Ā 

That is 100 percent right and thatā€™s the same thing in Europe.Ā  I always say that Europe is a giant Ponzi scheme because how it operated was that the young people who came in, they paid for those who were leaving, the Socialist System.Ā  What happens when the young people are not coming in anymore or when you have a population thatā€™s not growing?Ā  Whoā€™s paying for the people that are going out?Ā  Very simply, that is what Italy faced and they did it at a time where there was a lot of credit being given and people were living off credit (thatā€™s why the debt is going up) and it has to be reversed.Ā  The whole of Europe lives in a system of entitlement, whether it is medical health or pension and so on, and they have to change their attitudes.

What do you make of the European quantitative easing, this stimulant into the system?Ā  I ask this because Laura Tyson, who I also managed to talk to in Davos, said, ā€œIt’s only breathing space.Ā  Unless they fix the structural issues youā€™ve referred to then the QE is going to be a waste of money.ā€Ā 

Absolutely right, and Draghi openly says it.Ā  You hear it from the IMF.Ā  If you donā€™t change labour legislation.Ā  If you donā€™t make it easier to do business.Ā  If you donā€™t address those entitlement issues, Iā€™m afraid Europe is going to atrophy.

Iā€™ll tell you a little bit of hope on both of these issues.Ā  South Africa hasnā€™t gone down the track as far as Italy, not by a long shot.Ā  Secondly, the CEO of ADECCO made a very good point.Ā  Supposedly, young people donā€™t want to work in Europe.Ā  He said that, on average, their research shows a young person sends out their CV 11 times in a month, so they want to work.Ā  The entitlement might be there with their parents.Ā  However, the younger generation wants to get into the market, but theyā€™re being blocked by the labour legislation, which keeps older people, who are bored, tired, and stale in jobs.Ā  Thatā€™s not right.

No, it isnā€™t but how do you get the older people out because you canā€™t.

More of them are devoted to politicians.

Yes, itā€™s not easy.Ā  I certainly donā€™t have the solution for you.Ā  Why is America doing well?Ā  Itā€™s because they donā€™t have those issues.

Yes, they donā€™t have structural issues that they need to address but thatā€™s why you need a Matteo Renzi.Ā  You need, almost a politician to come into the ANC in South Africa and say ā€˜okay, Iā€™m not going to be a politician for very long (maybe four or five years), Iā€™m going to do the unpopular things but it will fix the economy.Ā  At the end of that I will probably never be re-elected again, but weā€™ll have a thriving countryā€™.Ā 

Youā€™ve not only got a young Premier in Italy, youā€™ve got the same in France as well.Ā  Thereā€™s some young blood there also trying to get in.

Theyā€™ve got Alexander Stubb, who is also 40 years old, so theyā€™re another country with six years, no growth, in Finland.Ā 

I want to tell you something though.Ā  If you want to make money this year go to Europe.Ā  Thereā€™s some fabulous companies.Ā  The Euro has fallen, making them a lot more competitive.Ā  There are brands like LVMH, BMW, and Daimler you name them, their pharmaceutical companies who are selling out into a global environment.Ā  In fact, Europe probably looks as the most attractive area to go into, on a selective basis.

If you made an investment today in S&P500 or the Euro Stoxx…?

Iā€™d go Euro Stoxx.

I do think that sometimes in South Africa our problems look insurmountable to us but judged next to the problems as many other countries in the world.Ā  We can manage them.Ā  We can break them and sometime the penny’s going to drop…Ā 

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