Amsa’s nerves of steel
Paul O’Flahert y, CEO of ArcelorMittal South Africa (Amsa), said he was heavily occupied with regaining the trust of government during his first six months at the company. “The relationship was very dysfunctional,” he told Finweek.
His hope now is that government will support his request for tariffs in order to protect SA’s domestic steel production from some 1.6m tons a year in cheap steel imports (domestic production of crude steel totalled an estimated 7.2m tons last year, according to the World Steel Association). “We have been given a sympathetic ear,” he said of government negotiations. Whether that will translate into substantive action is another matter.
There’s a theory out there that the last thing government wants is to bail out a potential competitor, even if that does mean saving thousands of jobs. Already, Evraz Highveld Steel & Vanadium announced on 21 July that it was entering into business rescue proceedings and that it would be suspending production in order to curtail costs.
An agreement was signed last year between the Industrial Development Corporation ( IDC) and Hebei Steel to investigate building a steel plant. A feasibility study is currently underway and if it passes muster, government will embark on its own steel-making facilities as a key part of its industrialisation policy.
It doesn’t necessarily need import protection, as it will have a competitive advantage should legislation supporting developmental pricing of i ron ore and coal be promulgated i n terms of amendments in the Minerals and Petroleum Resources Development Act (MPRDA). The MPRDA is currently stranded in parliament, awaiting further dissection.
O’Flaherty acknowledges the existing conditions that motivate government antipathy to his company. One is a paragraph in the Industrial Policy Action Plan that talks about increasing and building competition. “That is where the debate comes in,” said O’Flaherty.
He added, however, that Amsa was prepared to make a number of concessions and commitments in return for winning the protection of government, including settling its Competition Commission issues, discussing “a fairer price for steel”, and following through on R4.5bn in specific projects in order to boost job creation. “We need tariff protection and localisation of steel in order to survive,” CEO of ArcelorMittal SA he said.
Already, Amsa has alerted shareholders to the likelihood of restructuring its Vereeniging Works, affecting hundreds of jobs. There’s also the risk that the entire sector could be vulnerable to the downturn in world markets.
“We are talking about a steel industry that directly provides 200 000 jobs on a primary basis,” said O’Flaherty. “Without the primary steel industry, the industrialisation in the National Development Plan would be extremely difficult. If we have to shut the entire industry, it would take 10 to 15 years to rebuild it. I don’t think that is an option.”
O’Fla her t y i s a l s o hoping t o renegotiate some 6.25m tons in iron ore supply from Kumba Iron Ore, or source the iron ore from elsewhere as there are no take-or-pay conditions attached to the contract. As far as industry ironies go, this is right up there.
Amsa and Kumba duked it out from 2010 to 2013 over ownership of a 21.4% stake in Sishen Iron Ore Company (SIOC), with the matter eventually ending up at t he Constit ut i onal Court. In the end, the cost-plus sales arrangement between Kumba and Amsa was renegotiated while the stake in SIOC was awarded to Kumba, with conditions attached – the details of which are still unknown.
It’s possible these conditions may ask Kumba to commit to a developmental pricing regime, possibly to a government initiative such as a steel facility, although whether that would be extended to Amsa is anyone’s guess at the moment.
In t he meantime, a key part of SA’s industrial landscape continues to struggle. Amsa reported a R109m interim headline loss last week – a R103m deterioration over the R6m loss in interim earnings of the previous financial year – while prospects for the international steel industry remain depressed.