Amsa’s nerves of steel

Finweek English Edition - - IN THE NEWS - BY DAVID MCKAY

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.

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