STEELING FOR FAILURE?

The world’s biggest steelmaker had some great years in SA when it first started doing business here, less than two decades ago. Now things have deteriorated to such an extent that some analysts say it’s only a matter of time before it closes its doors in this country and concentrates on other parts of its global empire

Traditionally portrayed standing on a sacred lotus flower, her four arms outstretched and her raven hair extending past her waist, the beautiful Lakshmi, goddess of wealth and prosperity, is among the most popular of Hindu deities.

Her devotees believe that arrogance and complacency will drive her away. But if they work hard and are sincere, Lakshmi will bestow good fortune upon them.

It’s a fitting name, then, for one of the world’s richest people. Lakshmi Mittal, with a net worth of $9.8bn, grew up in Kolkata, India, in the 1960s, where his father ran a steel mill. He was quick to branch out, starting his first mill in Indonesia and steadily building an empire that, today, is Arcelormittal — the world’s largest steelmaker.

Mittal’s secret is said to be his gift for acquiring and turning loss-making operations around. In 2001 he turned his gaze to SA, where one of his companies,

LNM Holdings, entered into a threeyear business-assistance agreement with Iscor. The

SA parastatal, which owned steel mills and iron ore mines, was in the process of unbundling.

By 2004, LNM was a controlling stakeholder and, by 2006, through a series of global mergers, the company was trading locally as Arcelormittal SA (Amsa).

Those were the good days. With a preferentially priced, long-term iron ore supply deal with Kumba, and economic growth above 5% and rising, the business was highly profitable, with blue skies ahead of it.

Fast-forward to 2020 and everything has changed. Amsa is posting sizeable losses every six months (R3.3bn at the end of December, and R2.6bn in the first half of 2020). Since 2014 its workforce has more than halved, from 15,000 to 7,000. Most recently, 1,000 jobs were culled with the closure of Amsa’s Saldanha mill, and the company has started a restructuring process that could affect another 2,000 workers now that the Covid-19 pandemic is beginning to bite.

The Amsa share price has been obliterated. In 2011 it was R87. It now trades at 46c.

It’s hard to see an investment case for the business. “As an investor I look at it and think, my goodness, it’s 46c a share, R500m market cap,” says Bruce Williamson, chief investment officer at Integral Asset Management. “There are some people who could write a cheque and just buy it. But why would you do it?”

Mike Benfield, CEO of Macsteel, the largest steel merchant in SA and Amsa’s largest customer, says it’s clear the steelmaker can’t sustain its current losses. “The big question on everyone’s lips,” he says, “is when does the shareholder pull the plug?”

Lakshmi Mittal

An existential threat?

Amsa has made a few missteps through the years — notably allowing the cost-plus iron ore supply deal with Kumba to lapse. But it’s also been struggling to keep up with unsustainably high electricity, rail and port costs.

In years gone by, before these challenges

came to the fore, the company and the government developed a somewhat adversarial relationship, with Amsa accused of passing little benefit to SA, despite earning handsome profits here.

SA’S competition authorities also found, more than once, that the company had engaged in anticompetitive behaviour.

But everything changed in 2015 when China entered the fray, looking to unseat Japan as the world’s largest steel producer.

By relying on subsidies — in contravention of World Trade Organisation rules — China was quickly able to undercut competitors and flood the world with cheap steel. Some producers, such as Japan, followed China’s prices down — though at tremendous cost. Others refused to drop their prices, but ultimately lost market share.

Then came the import duties.

TAILING OFF

“Just about everyone began to panic and steel became the sector with the most dutyrelated remedies by a long stretch,” says Donald Mackay, director at XA International Trade Advisors. As a result, China sought out less-protected markets for its steel. “A small part of that [Chinese steel] arrived in SA,” says Mackay. “In our terms it was a lot. For China it’s a rounding error.”

Amsa, haemorrhaging cash, turned to the government to impose import duties.

In principle, duties should be applied as close to the consumer as possible,

Mackay says.

“The further upstream you go, the more difficult it is to predict what the impact of a duty will be. And you can’t get further upstream than Amsa.”

Nonetheless, in 2015 — after a meeting between Mittal and then-president Jacob Zuma — the government imposed a 10% duty on most raw steel products.

Not long after, Amsa brought a safeguard action — a duty intended as a temporary measure — on hot-rolled steel, a widely used primary steel product. By August 2017, that safeguard duty was in place.

Mackay says Amsa is facing a genuine existential problem, but the question is whether the duty was the correct remedy. “I would argue that the duty exacerbated the problem, because it drove up the import of downstream products.”

The safeguard dutiy not only prevented certain products from entering SA, he explains, but the overall consumption of primary steel in SA also dropped.

“There is no doubt that the effect of the safeguard is that it forces down the volume of primary steel,” says Mackay.

The problem is, with a 10% customs duty, plus a 12% safeguard duty on certain primary products, the measures appear to have encouraged industry to import finished goods. These are often subject to lower duties and are more competitive than if they were produced locally from Amsa steel. Though there are duties in place to protect some locally manufactured goods, the downstream sector is far too broad to protect all of them.

“Amsa and government have created a false dichotomy,” says Mackay. “They say: either you give them [Amsa] the duty and they survive; or you don’t and they fail. I think that’s misleading. They’ve had the duty

What it means: The importing of cheap Chinese steel has contributed to the Amsa share price’s collapse from R87 in 2011 to 46c now

for three years and every year they do worse than the year before.

“Maybe the effect of the duty is that not only has Amsa done worse in this period, but it’s also [destroyed] a large chunk of the downstream sector.”

Amsa refused a sit-down interview with the FM, but in written response argues that the tariffs protect the entire SA steel sector.

The company says some manufacturers were beginning to thrive as a result of the protections. Since 2019, however, the protections have been rendered somewhat ineffective for three reasons: other countries have imposed higher tariffs much quicker than SA; importers are bringing in alternative steel supply from countries not covered by the safeguard; and some companies, Amsa claims, are fraudulently declaring steel products under incorrect tariff headings to avoid paying duties.

Squeezing the downstream sector

In October last year, steel tube and pipe manufacturer Robor closed its doors for good after 97 years of operation.

Rising power and labour costs are a worry for most SA businesses, especially manufacturers, but many downstream steel players say they also struggle because they are compelled to buy product from Amsa, rather than importing it.

SS Profiling CEO Theunis Duvenage says he pays 30% more for local hot-rolled steel than he would to import it, and that’s on a small scale.

“If the steel you use to manufacture is expensive, the end product will be uncom

Samson Mokwena: Has raised concerns about the contamination of underground water petitive — and we are being forced by the duties to buy expensive steel from Amsa.”

It is a real problem if you consider, for example, that steel makes up 80% of input costs in tube-making, and between 60% and 70% in construction.

Paolo Trinchero, CEO of the Southern African Institute of Steel Construction, says the downstream sector needs a competitive input price for steel if it is to compete with finished goods and export product.

Meanwhile, the local mill needs customers to survive — and in the absence of those, it requires more and more protection, which further affects its local customer base. “We’ve ended up in the vicious circle in the industry, and it’s created a lot of division,” says Trinchero.

Charles Dednam, secretary-general of the SA Iron & Steel Institute, which represents

Environmental cost: Pollution from Amsa’s Vanderbijlpark plant the upstream industry, thinks it all comes down to a lack of economic growth.

While SA’S economy is staring into the barrel of a 7% contraction this year, Dednam notes that sustaining steel consumption levels requires at least 2% annual growth.

Steel consumption and GDP are directly correlated, says Trinchero, who agrees that the crisis in SA steel is driven mostly by lack of demand, which renders the industry uncompetitive.

With no infrastructure projects to speak of, SA will consume 3.5Mt of domestic steel in 2020, down from 4.5Mt in 2019 — about half of SA’S 8.5Mt production capacity. “To sustain a big integrated steel mill like Amsa at low levels like this will be a severe crisis for them,” says Dednam.

The international trend is for more flexible operations. “That is the biggest problem

we are faced with at the moment,” he says. “We don’t have the flexibility to throttle our supply to match our demand.”

Environmental fallout

Samson Mokwena comes from a family of steelworkers. His father worked at the Amsa Vanderbijlpark steelworks for more than 30 years; his brother for 15.

In about 1994, Mokwena’s father bought a smallholding west of the mill, in an area known as Steel Valley.

But it wasn’t long before he and other landowners came to learn that the land was contaminated, thanks to unlined dams where the steel mill had dumped toxic materials. These had leeched into the groundwater, affecting the entire area.

After a series of legal actions, most residents accepted cash settlements from the company and moved on. Those who remain have over the years reported alarming environmental effects, with stunted and deformed animals a grisly common feature of their accounts.

Amsa says such allegations are speculative and unsubstantiated.

Mokwena is now the co-coordinator for the Vaal Environment Justice Alliance (Veja), a nonprofit that pressures industry in the area to comply with regulations, invest in communities where it’s caused environmental harm and recognise a legacy of “environmental racism”.

Steelworks began operating in the area in 1947, with the town of Vanderbijlpark (later known for its grand, tree-lined boulevards) being proclaimed two years later.

The Vaal triangle area soon became home to state-owned entities (SOES) Sasol and Eskom, and established itself as the industrial heartland of the apartheid state.

With industry came plenty of cheap, migrant, black labour, and townships were established downwind from polluting operations, Mokwena says.

He sees no environmental consciousness in the way Amsa operates. “Farmers can’t use boreholes, the underground water is contaminated. There is a culture of secrecy at Amsa that comes from that era — that culture has not changed.”

Because of the visible collapse of industry in the area, the Vaal community is increasingly concerned about environmental sustainability.

“We are aware that the jobs that were there are gone,” says Mokwena. “What we are concerned with now is to protect the environment so that future generations can benefit and make use of natural resources.”

In 2014, the Centre for Environmental Rights (CER) represented Veja in a court case that led to the appeal court ordering Amsa to make public a 2002 document, “the Master Plan”, which highlighted the environmental risks caused by its Vanderbijlpark operations. CER attorney Michelle Koyama says the company’s transparency improved somewhat after the case, but has since deteriorated.

The CER continues to request reports from Amsa relating to compliance with its air-emission and water-use licences, and progress on remediating contaminated land. It is information that should be in the public domain, but the centre often has little joy.

What is available indicates a raft of environmental issues.

The department of environment, forestry & fisheries releases an annual national compliance and enforcement report, which highlights companies that are problematic or violate the laws. Amsa regularly features in that report.

In 2018, the government issued the company with a remediation order over contamination tar and tar remnants — a byproduct of the coking process — in the groundwater.

Koyama says in some boreholes there is thick tar at the top of the well.

There is also evidence that contaminated water from Amsa operations is finding its way into tributaries that connect to the Vaal river, despite Amsa claiming otherwise, she notes.

This year, the department slapped Amsa with a R3.6m fine for exceeding minimum emissions standards for hydrogen sulphide.

Amsa is building a sulphur abatement plant to address the issue. It built one previously, but the CER has been unable to find out why it failed to operate beyond a few months in 2010.

Recently, the department approved the steelmaker’s application to postpone its compliance with emission standards. Koyama says Veja and other environmental justice organisations, assisted by the CER, will appeal against the decision.

Thabang Thlaku, mining and commodities analyst at SBG Securities, says the reality is that primary steel manufacturing is a polluting process, not just in SA but the world over. “There is ongoing research to find cleaner ways to produce crude steel,” she notes.

Arcelormittal itself has established a pilot project in Germany to produce steel from green hydrogen rather than from coking coal. That’s some way from being commercially viable.

But even with the mitigation solutions that are available in the market, “environmental compliance costs remain prohibitively expensive” given Amsa’s current financial standing, Thlaku says.

Amsa, which says it operates under environmental authorisations and licences, acknowledges it faces compliance issues “from time to time” that it is working hard to resolve.

According to the company, a dearth of robust environmental legislation at the time the Vanderbijlpark works began operating in the 1960s resulted in past waste and effluent management practices affecting the environment. “The relics of [these] are still manifested today,” the company explains.

Some of these adverse effects cannot be

What we are concerned with now is to protect the environment so that future generations can benefit and make use of natural resources

Samson Mokwena

reversed instantaneously and remedial action often takes time to implement, it says. Despite severe financial constraints, Amsa says it is still investing in projects to mitigate environmental effects and enhance compliance.

But Koyama says Amsa can do better. “Compliance with the law is not optional. In any event, transparency costs nothing.”

Looking for savings

As Amsa’s business looks to have grown increasingly unsustainable, the prospect of its failure has become a very real concern.

Duvenage says it’s simply too inefficient. Old steel mills use 60% more electricity than modern mills, but he says Amsa’s situation is made worse because it has a split manufacturing process — it produces raw steel, cools it down and transports it 1.5km, then reheats it and works it further.

The company denies this, saying its process efficiencies compare well with the rest of the world. It has also found a number of ways to reduce electricity use, but says this is not enough to counter huge electricity price increases — a rise of 185% in 10 years.

The company has also “invested significant time and effort” in approaching the government and relevant SOES to address uncompetitive tariffs, to no avail.

However, Amsa acknowledges that it cannot rely on government support alone to ensure the sustainability of the business. So increasing efficiency is its dedicated focus.

A business transformation programme aims to position Amsa among the lowestcost producers in the Arcelormittal group by 2023. To date, the company says, it has delivered R2.7bn in cost improvements.

Meanwhile, the group has continued investing to ensure the sustainability of Amsa’s plants and drive the efficiency and cost-competitiveness of the business.

Having reassessed the company’s strategic asset footprint for 2020, Amsa temporarily idled further assets — such as the Vanderbijlpark blast furnace — until demand recovers. Another labour reorganisation will give effect to the implementation of a single, agile operating model, and to downsize the business to align with the weaker economic outlook for the next few years.

Amsa is also seeking to extend the safeguard duty — originally intended as a temporary measure. That’s causing uproar among many downstream players, some of which are threatening litigation if the government doesn’t see sense.

Mokwena says shareholders are absent. The government’s Industrial Development Corp, which holds 8% of Amsa, should be raising key questions about the environment, as well as job preservation and employment creation, he says.

The parent company in Luxembourg, too, has a duty to ensure that Amsa makes money and preserves jobs, says Mokwena.

Williamson says

Amsa needs to be recapitalised with about R3bn. At current prices, a rights issue is unlikely.

Though the parent company has helped

Amsa (most recently with a R1bn interestfree loan) Williamson isn’t sure Mittal will keep throwing good money after bad.

Duvenage says it makes no sense for the parent company to invest any more. “The cow is nearly dead, they are just going to milk it for as long as they can, but you can’t really blame them for not investing in SA.” Williamson tends to agree. After all, Mittal has the whole world to play in — and there is no policy coming out of SA to encourage investors to spend more here. “I think the Mittal group will sit and look at all of this and come to the same conclusion: you know, where’s the growth?”

Thlaku, however, notes that Amsa has worked hard to reduce fixed costs and is doing well to decrease its iron ore bill by finding alternative and cheaper suppliers. She says the parent company also appears to be supportive, having grown its shareholding to just under 70% after a previous rights issue.

Though Amsa is focused on driving efficiencies, it says the local steel industry needs intervention from the government. A government-led steel masterplan is in the works, and will be critical to the survival of the industry. It includes initiatives to fasttrack infrastructure projects, “hopefully with the insistence on using domestic steel”,

Amsa says.

Dednam, too, says investment in infrastructure is the way to drive up steel consumption — but that needs to happen now. “There are plenty of things happening, but it’s all happening on paper — it needs to be rolled out,” he says. “Government seems to disregard the urgency of the matter and I’m afraid if they are going carry on like this, we may not have a steel industry in the next couple of years.”

The National Union of Metalworkers of

SA, the majority union at Amsa, also wants the government to step in. General secretary Irvin Jim says the union wants increased protection for the steel industry, and wants any government-led infrastructure plans to ensure that all steel used is made locally.

Jim dismisses the idea that protectionism is hurting the downstream sector, noting that certain players blame the tariffs when in fact they opt not to manufacture in SA, preferring

Government seems to disregard the urgency of the matter and I’m afraid if they are going carry on like this, we may not have a steel industry in the next couple of years

Charles Dednam

to downscale and simply import finished goods from China.

While Trinchero says fixed infrastructure projects would be most welcome, he doesn’t think there is a silver bullet for SA steel any more. “I think one has to restructure significantly and basically rebuild from there.”

Is there life after Amsa?

Gerhard Papenfus, chief executive of the National Employers Association of SA and a vocal opponent of tariff protection, does not deny it has become very difficult for Amsa to operate. But “the real question is, does it need to survive?” he asks. “Unless [Amsa] can compete internationally, it has to go.”

There is a general belief among industry players that SA needs a primary steel producer to create a competitive steel industry, while also generating jobs and foreign exchange.

Some, like Duvenage, think that’s an outdated notion. Vietnam, he notes, never had a primary steel producer but imported raw material from China at low prices and developed its own local steel industry, which has grown 20-fold over the past decade.

But Dednam doesn’t see how the downstream sector will survive without a primary producer like Amsa. He points to Australia, where the primary steel industry disappeared and the entire industry ultimately collapsed.

“If you don’t have a primary steel industry, it will be a huge effort to keep your downstream industry alive,” he says. “For now, competition is on the lower end of the price spectrum, but I’m quite sure it won’t stay there.

“As soon as there isn’t local competition for the imported product, the imported product will come at normal world steel prices and will not be discounted.”

But what if Amsa simply can’t be saved? Duvenage believes it’s not a question of if, but when. “We have to start preparing for life after Amsa,” he says.

Amsa’s failure is a possibility for which merchants such as Macsteel continue to plan. Should Amsa shrink to a shadow of its former self or disappear altogether, Macsteel’s Benfield believes the industry will cope. The well-entrenched merchant network can jump in and import steel in the interim, and he believes the private sector will find ways around the port capacity constraints, an oft-cited issue.

But an import strategy, though necessary, would be an interim solution. The sector would still want a local primary steel producer in the long term, says Benfield.

Importing means longer lead times and that costs money. “It’s more inventory you have to hold,” he says. “The downstream customer will have to absorb cost, but let’s hope it’s for the short term. The risk is that they don’t absorb the cost. Then that’s the beginning of the end …”

He notes that other primary producers — the mini-mills that largely produce steel from scrap — are slowly developing alternative supply, the quality of which is expected to improve over time.

Even if the downstream can make a plan, no-one will survive prolonged negative and low economic growth.

Benfield says the government simply has to create a pro-growth environment that allows the private sector to get involved — be it on the next harbour, or the next rail link, for example.

“We are all ready to invest, we want to invest, we will borrow the money and we will invest if there is a business case,” he says. “But don’t be sluggish. This is the issue, we are so frustrated talking about the same thing every day.”

Trinchero also believes the broader industry will find a way to survive, probably by finding niches in which it can compete.

But it might mean that manufacturing happens outside SA — some of which is already happening, in response to tariffs and other growing input costs.

“It’s a pity because we have amazing infrastructure in terms of steel in the SA context,” Trinchero says.

“We have huge facilities, with enormous amounts of capacity, but if we can’t produce economically in these areas then companies will have to adjust.”

Duvenage says there is no reason to hold on to a primary steelmaker like Amsa just in case economic growth picks up in years to come. Rather, he says, revived demand — if and when it comes — will automatically attract an investor, “and you’ll be glad it’s not Amsa any more, with its expensive steel”.

But Williamson fears Amsa’s failure will be devastating for SA. “It touches the whole economy in many respects. Its closure would cause huge knock-on social impacts. It starts in Vanderbijlpark, and spreads rapidly from there.”