CityPress - - Business - MAR­CIA KLEIN business@city­

Steel man­u­fac­turer ArcelorMit­tal SA is in­ef­fi­cient and un­der­per­form­ing, its out­dated tech­nol­ogy is cost­ing it dearly and it is be­ing ham­mered by cheap Chi­nese im­ports.

The company, which in­curred a net loss of R2.1 bil­lion last year, faces po­ten­tially fa­tal fines from com­pe­ti­tion au­thor­i­ties (where five cases against it are at the com­pe­ti­tion tri­bunal after re­fer­ral for pros­e­cu­tion by the com­pe­ti­tion com­mis­sion) and a po­ten­tial car­bon tax bill of R600 mil­lion a year.

Not only is gov­ern­ment, with which ArcelorMit­tal has a par­tic­u­larly bad re­la­tion­ship, call­ing for it to re­duce prices, it is plan­ning a mas­sive ri­val steel project of its own.

Just one of th­ese fac­tors could sink the company. In a per­fect storm, they leave it with no chance of sur­vival.

It is ar­guable new chief ex­ec­u­tive Paul O’Fla­herty has seen worse, hav­ing left his po­si­tion as Eskom’s fi­nan­cial di­rec­tor last year. He is mat­ter-of-fact about what he has seen so far, and about the road ahead.

His chal­lenges, 90 days into his new job, are pal­pa­ble. Lower steel de­mand (it has de­clined 5% a year since 2007), in­creased com­pe­ti­tion from China, strikes, elec­tric­ity short­ages and the R2 bil­lion re­fur­bish­ment of its New­cas­tle op­er­a­tion have re­sulted in a grad­ual ero­sion of prof­its.

Its net loss was R2.1 bil­lion last year, and while O’Fla­herty ex­pects it to try to break even this year as New­cas­tle comes back on stream, in its cur­rent form, ArcelorMit­tal SA is barely sus­tain­able.

This makes it dif­fi­cult for O’Fla­herty to con­vince his ma­jor share­holder, Lak­shmi Mit­tal’s ArcelorMit­tal group, to main­tain in­ter­est in the company, which ac­counts for 4% to 5% of global rev­enue, but is one of the worst per­form­ers in the group and cur­rently makes no con­tri­bu­tion to its profit.

New­cas­tle should re­main worth­while but the Sal­danha op­er­a­tion, ac­cord­ing to O’Fla­herty, was set up for the ex­port mar­ket on the guar­an­tee of low ore and elec­tric­ity prices as well as the as­sump­tion of re­li­able labour and trans­port, none of which ex­ist.

But the big­gest prob­lem is the be­he­moth in Van­der­bi­jl­park, which is an ex­tremely dif­fi­cult turn­around chal­lenge. He is fully aware the bulk of the 14 000 work­ers are there, and that with­out Van­der­bi­jl­park, “there would not be a Vaal tri­an­gle”.

A mea­sure of its size – and its in­ef­fi­ciency – is summed up in the fact that there is 200km of rail, in­ter­nally, at the Van­der­bi­jl­park op­er­a­tion.

And cloud­ing all its prob­lems is a strained re­la­tion­ship with gov­ern­ment, which may or may not ex­plain the In­dus­trial De­vel­op­ment Cor­po­ra­tion’s steel in­ten­tions. Apart from its in­ter­est in Scaw Met­als, among oth­ers, the cor­po­ra­tion has signed an agree­ment with Chi­nese He­bei Iron and Steel for a R50 bil­lion low-cost iron and steel fa­cil­ity to pro­duce 5 mil­lion tons (more or less equiv­a­lent to ArcelorMit­tal’s cur­rent pro­duc­tion) by 2017.

O’Fla­herty can­not say what gov­ern­ment’s steel in­ten­tions are, but he has been told the steel could be ex­ported to coun­tries in the South­ern African De­vel­op­ment Com­mu­nity.

But he is try­ing hard to “ex­tend an olive branch” to gov­ern­ment, adding that the start­ing point is his ques­tion to gov­ern­ment on “whether ArcelorMit­tal is go­ing to be a fea­ture of South Africa or not”. En­gage­ments so far have been con­struc­tive.

Another huge stum­bling block is BEE, and O’Fla­herty ad­mits ArcelorMit­tal is non­com­pli­ant un­der the new codes.

A con­tro­ver­sial deal a few years ago, which in­volved mem­bers of Pres­i­dent Ja­cob Zuma’s fam­ily and the Gupta fam­ily, as well as Zuma’s con­fi­dante Sandile Zungu, was shelved.

It needs to find a part­ner, but O’Fla­herty says the share­holder has told the lo­cal company to sort out other pil­lars of the BEE score card be­fore it looks at own­er­ship, some­thing it is ac­tively ad­dress­ing.

ArcelorMit­tal also faces huge en­vi­ron­men­tal chal­lenges be­cause it is a ma­jor pol­luter with its old tech­nol­ogy.

For ev­ery ton of steel it pro­duces, it emits 3 mil­lion tons of car­bon. “If car­bon tax hits us in its cur­rent form, there is no business,” he said, adding the depart­ment of en­vi­ron­men­tal af­fairs “is hav­ing good dis­cus­sions with business and look­ing at var­i­ous mech­a­nisms and in­dus­tries to treat dif­fer­ently, but they are adamant that in 2016, car­bon tax will be here”.

O’Fla­herty’s pri­or­ity is to re­store good re­la­tions with gov­ern­ment quickly “and get on the same page on pric­ing and support”.

He is also “look­ing at the business case of all our op­er­a­tions and how low we can bring costs down”.

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