Sunday Times

ArcelorMit­tal fast becoming a dead weight on industry

Virtual monopoly is protected at expense of downstream manufactur­ing in SA. An executive’s response to claims by the steelmaker’s CEO


● There is no question that the South African steel sector is in crisis for all who are involved in it — by no means only its principal primary steel producer, ArcelorMit­tal South Africa.

While we continue to blame this longstandi­ng crisis on China, it is important to look in the mirror and ask ourselves what we have done to reinforce and strengthen South Africa’s position.

There is no dispute as to the contributi­on the local steel industry as a whole makes to GDP, to the creation of jobs both directly and indirectly and to the fiscus.

It is imperative that we acknowledg­e and accept that South Africa operates in a global economy. It would be naive to believe the hypothesis that by importing steel we would be leaving both upstream and downstream industries at the mercy of the global steel market.

What is the alternativ­e — leaving the downstream manufactur­ing and steel fabricatio­n industries at the mercy of a perpetual loss-making monopolist­ic single local primary steel producer?

To think that having a single primary domestic steel producer lessens the risks to any downstream player by offering protection against raw-material market volatility is absurd.

Do we honestly believe that local pricing of steel would not be impacted by changes to the internatio­nal price of raw materials used in the production of steel?

The words “import parity pricing” ring loud when casting one’s mind back to local steel pricing over past years!

ArcelorMit­tal has, since the demise of Highveld Steel, become a sanctioned de facto monopoly as far as steel production in South Africa is concerned — this, despite its ageing plant, dated technology and implicit production inefficien­cies and reliabilit­y challenges.

So, instead of a full-blown modernisat­ion and recapitali­sation of the company, the Department of Trade and Industry introduced a 10% customs duty on hot rolled coil in June 2016, followed by a safeguard duty of 12% in August 2017.

So what has since happened to pricing and credit terms?

ArcelorMit­tal’s selling price of hot rolled coil quickly increased by amounts similar to both the customs duty and safeguard duties

Basically, the South African consumer is funding this ageing, inefficien­t and financiall­y burdened local steel producer

imposed on imports.

Over the past year, ArcelorMit­tal has unilateral­ly removed volumetric rebates to its larger customers/distributo­rs of around 3% and imposed strict 30-day credit terms.

Basically, the South African consumer is funding this ageing, inefficien­t and financiall­y burdened local steel producer, which recorded a loss of more than R5.1-billion in 2017 and a R4.7-billion loss in 2016.

Interestin­gly, over this comparativ­e period, the ex-factory pricing of steel in US dollar terms increased by only 1.6% from deliveries from China and only 14.7% from Western European steel producers.

This, together with extended credit terms of up to 180 days to larger customers, is in stark contrast to the 22% price increase charged by ArcelorMit­tal on 30-day credit terms.

As long as ArcelorMit­tal continues to formulate pricing models that exclude China and other Asian countries, we will continue to face a pricing model not aligned to the global reality.

Protected steel price increases by ArcelorMit­tal significan­tly expose the South African downstream steel fabricatio­n industry to the importatio­n of competing finished products, as local fabricator­s cannot absorb the increased burden of comparativ­ely higher input steel costs. This also opens the door to possibly the bigger threat of substitute steel products, namely cement, timber and speciality plastics.

The so-called increased risk of unreliable supply due to South Africa’s distance from the nearest steelmakin­g countries is simplistic. The reality is that primary steel products sourced globally can be landed in our ports and transporte­d via road or rail with no business impact on planning, production, working capital and stock holding.

There is consensus that South Africa must increase its industrial manufactur­ing capacity to satisfy local demand while remaining competitiv­e on the internatio­nal market.

The imposition of customs and safeguard duties to protect our local primary steel producer has a negating effect on this strategic objective. It erodes South Africa’s ability to export steel fabricated products, places margin stresses on an already beleaguere­d downstream steel manufactur­ing sector, puts tens of thousands of jobs at risk and increases inflationa­ry pressures — all of which contribute to a vicious cycle of a weaker local currency translatin­g into even higher steel prices.

All-inclusive programme

A key starting point to fixing South Africa’s industrial manufactur­ing predicamen­t is to have state-of-the-art, reliable and efficient primary steel producers capable of supplying high-quality steel at internatio­nally benchmarke­d prices and terms.

ArcelorMit­tal’s piecemeal balance sheet restructur­ing and “patched” recapitali­sations, together with protection­ist local pricing, do not serve this purpose.

If South Africa seriously wants to accelerate activity in its steel sector, this needs to be an all-inclusive programme involving raw material producers, steel producers and downstream manufactur­ers and fabricator­s. Their fortunes are inextricab­ly linked.

In the absence of an efficientl­y operating ArcelorMit­tal, imported steel coupled with extended payment terms remains a viable downstream manufactur­ing alternativ­e for both the local and export markets, protecting the estimated 170 000 jobs provided by downstream industries.

 ?? Picture: Getty Images ?? ArcelorMit­tal has become South Africa’s de facto monopoly steel producer since the demise of Highveld Steel, according to a steel executive.
Picture: Getty Images ArcelorMit­tal has become South Africa’s de facto monopoly steel producer since the demise of Highveld Steel, according to a steel executive.

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