The decline and fall of South African steel

Rand Daily Mail, 04 August 2015
By Mark Allix

Uncertainty hangs over SA's steel industry after creditors approved extended business rescue proceedings for the country's second-largest producer. Considerable uncertainty hangs over SA’s steel industry after a majority of creditors approved extended business rescue proceedings for the country’s second-largest producer, Evraz Highveld Steel & Vanadium.

Business rescue practitioners cite confidentiality over any bid process. The company’s replacement cost is pegged at about R30-billion, but its assets have been written down to only R1.5-billion. Meanwhile, the media have reported that ArcelorMittal SA has asked government to impose a 10% import duty on steel in return for possibly offering shares to black empowerment partners.

ArcelorMittal SA will not confirm this, stating only that, contrary to reports, none of its SA assets are being put up for sale. “ArcelorMittal SA has not made any definitive decisions pertaining to any plant closures. All stakeholders are currently being engaged about the extremely difficult trading conditions in the steel market, which are being exacerbated by increasing uncontrollable costs and a flood of cheap steel imports from China,” the group says.

“The issue of the 10% tariff ... is a matter of public knowledge and the company deems its ongoing discussions with government as private and confidential.” CEO Paul O’Flaherty says the group has asked for protection of between 5% and 10% on certain flat and long steel products. Africa’s largest steel maker is one of the biggest customers of Eskom and Transnet.

But along with imports, frequent power outages, violent industrial action, inadequate infrastructure and increasing production costs, SA’s metals and engineering sector is under siege.

Tariffs on steel imports might help.

The International Trade Administration Commission of SA (Itac) says its investigation of the possible introduction of import tariffs on galvanised and painted steel sheets “is at an advanced stage of completion”. “The commission received formal representations from a number of interested parties and is currently finalising its recommendations, which will be submitted to the minister of trade & industry,” says Foster Mohale, manager of Itac’s communication services.

Itac says it is not aware of any empowerment deal in exchange for an import duty and that “its decision on this matter will not be complicated by such”. Garth Strachan, deputy director-general of the industrial development division at the Department of Trade and Industry, also has “no knowledge” of any such offer.

There has been huge political pressure on ArcelorMittal SA since a prospective R9.6-billion empowerment deal linked to political heavyweights sank in 2011. The state has been trying to force the group to peg steel prices in the lowest quartile of global production to benefit its R4-trillion infrastructure plan to 2027. On the other side of the fence, an empowerment deal is also potentially a way of extricating Evraz Highveld Steel & Vanadium from its funding crisis.

Evraz and Scaw Metals, owned by the Industrial Development Corp and empowerment interests, can each produce about 1Mt of steel a year.
But care needs to be taken because had ArcelorMittal SA’s failed empowerment deal gone through, it would have been so far under water by now that it is unlikely the company could have continued trading.

Paolo Trinchero, CEO of the Southern African Institute of Steel Construction, says that in the first five months of the year, imports of primary carbon and alloy steel products — excluding certain products — shot up 69.4% compared with the same period in 2014. SA Revenue Service data indicates that imports of these products during the 12 months from June last year to May this year amount to 1.3Mt.

“So if we assume that steel consumption for last year was, say, 4.9Mt and this year, say, 4.4Mt, the percentage of imports ... is between 27% and 30%,” Trinchero says. “From a capacity point of view SA is about a 7Mt/year producer. So capacity utilisation could be around 70%. We have to take care here as the mills are indicating that conditions are very serious out there at the moment.”

O’Flaherty says that ArcelorMittal SA supplies about 65% of the steel required in SA and has about 80% of the country’s steel-making capacity. It employs 40 000 people, including contractors, and indirectly accounts for 60 000 jobs downstream.

“It’s our firm belief that without the steel industry, you will not have a competitive manufacturing industry, and you certainly won’t be able to drive the National Development Plan,” he says.

ArcelorMittal SA has recently added 400 000t of capacity a year at its Newcastle plant in KwaZulu Natal. O’Flaherty says there is a “massive opportunity” for the industry to create jobs and grow downstream beneficiation through the plan, estimating steel consumption will rise up to 14Mt/year to 2030.

Along with sub-Saharan Africa’s demand of 40Mt of steel a year, that should leave plenty of scope for SA producers.
Instead, the country’s steel industry is on its knees.