Closure of ArcelorMittal plants will be a sucker punch for SA

The announcement by ArcelorMittal SA in November 2023 that it intends to shut down its plants that produce long steel products at the end of January 2024 has led to an outcry by manufacturers reliant on specific steel grades.

The International Steel Fabricators of SA (ISF) and businesses in the downstream steel industry fear that a big part of SA’s manufacturing industry might evaporate due to government interference that gives preferential treatment to smaller steel mills that remelt scrap metal to make steel.

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Listen/read: SA steel sector warns of jobs bloodbath

Without saying outright that the steel from small electric furnaces is of bad quality, ISF chief executive Neels van Niekerk hints that these second-hand steel products are simply not safe to use in certain critical applications, such as in the automotive industry.

“The steel is good enough for household use like burglar bars, fences made of small rounds, flats, and angle irons. It’s not good enough for anything requiring certified material like construction, motor cars and the mining industry.

“These mills aim for the informal and household markets,” says Van Niekerk.

“Automotive steel components are typically safety-critical. The automotive industry bodies advised that any change in composition or supply chain requires substantial testing of new steel components before being approved, prohibiting any short-term change to input.

“These changes typically take more than a year. The only alternative is imports, if available.

“Some steel components in vehicles have been specifically developed for African conditions, and no alternative is available,” he says.

Domino effect

Van Niekerk warns that the domino effects of the closure of ArcelorMittal’s Newcastle and Vereeniging plants that produce long steel products will include an expected increase in the import of finished goods to replace locally manufactured goods.

Read: The collapse of SA’s Steel Master Plan and disintegration of industry

The users of products from the soon-to-be-shut plants include construction, automotive, mining, electro-technical, electricity transmission, aero and defence, rail, wire, fasteners, concrete reinforcing, cladding and roofing and rail.

Most of these are totally dependent on ArcelorMittal as the only local producer capable of supplying the bulk of their required long-product steel input.

“The resulting steel shortages from this decision [to close the plants] will lead to the almost immediate closure of industries that are reliant on the supply of long steel from ArcelorMittal and will subsequently bring production stoppages to many downstream plants over a wide range of depended sub-industries,” says Van Niekerk.

Preferential pricing

ISF called a summit of industry stakeholders, including ArcelorMittal, in January 2024 to discuss the effects of the plant closures and appeal to government to come to its senses and find a solution to keep the plants open.

Read: ArcelorMittal to cut 3 500 jobs in SA as growth slows

While ArcelorMittal indicated that 3 500 direct jobs will be lost, industry bodies expect another 30 000 jobs to disappear “immediately”, such as those working at suppliers to plants.

Up to 100 000 additional workers could face unemployment once downstream businesses start to fail, based on Seifsa’s estimate that the steel industry employs 270 000 workers.

ISF explains that ArcelorMittal is in dire straits due to a government policy that forces scrap metal dealers to sell scrap metal to smaller steel smelters at a discount of between 30% and 40% of global prices.

This led to ArcelorMittal losing sales volumes since the implementation of the Scrap Price Preference System (PPS) in 2013.

A stated purpose of the policy was the “regulation of exports to guarantee an affordable supply of quality scrap metal, to safeguard employment and to promote infrastructure development”. The policy, which dictates that scrap must be offered to local scrap smelters at discounts of between 30% and 40% on the international price, was expected to be in effect for five years.

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Serious accusations about government intervention in scrap metal market

Despite evidence that the policy intervention had not achieved its desired outcome by 2016 – and in fact, parts of the scrap-processing industry experiencing substantial decline, leading to closures and job losses – the PPS is still in force a decade later, with many new entrants attracted to the scrap smelting industry because of the support of the PPS.

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In addition, government has actively supported these smaller mills with billions in funding.

“The current investment exposure of the Industrial Investment Corporation (IDC) in the scrap smelting industry is alleged at over R14 billion, with R33 billion being added in the past four years. Importantly, during the same period, three of the scrap smelters enjoying IDC support went into liquidation, were placed in business rescue or closed their doors to business,” according to the ISF.

Level playing field plea

In its November 2023 announcement, ArcelorMittal said it is embarking on a process to wind down its long steel business.

It cited the current low market demand and national constraints beyond the company’s control (such as the extreme challenges in both logistics and energy supply in the country) and steel-related policy decisions that create an uncompetitive and unequal playing field for the company against its local competitors.

In his address to the crisis summit in January, ArcelorMittal CEO Kobus Verster repeated previous assertions that the company’s main request is a level playing field and that it be “afforded the same tariffs on energy and transport as other producers” and that “existing policy interventions on scrap metal, which give an unfair advantage to local scrap-based mini mill competitors, are removed”.

‘Best efforts’ made but …

The Sens announcement in November 2023 stated that the company implemented aggressive cost savings initiatives, improved raw material cost savings, made asset footprint adjustments and various other productivity initiatives.

“Unfortunately, despite best efforts, the initiatives implemented were not able to counter the combined effect of the following:

  • “A slow economy and difficult trading environment: On the back of low GDP growth in South Africa, in the past seven years, the country’s apparent steel consumption (ASC) has reduced by 20%, reaching levels of around 4.0 million tonnes, reflecting low market demand in key steel-consuming sectors, limited infrastructure spend and project delays, resulting in overcapacity in the market and overall weaker business confidence;
  • “National constraints beyond the control of the company: High transport and logistics costs, as well as energy prices, exacerbated by the well-publicised logistics failures and their resultant cost impact, and the prevailing electricity challenges that the country faces; and
  • “Scrap advantage over iron ore: The introduction of a preferential pricing system for scrap, a 20% export duty, and, more recently, a ban on scrap exports has allowed steel production through the electric arc furnaces route and an ‘artificial’ competitive advantage when compared with steel manufacturers using iron ore to produce steel.”

Volumes

The problem is falling volumes due to the dire state of the SA economy, which curtailed demand for steel products to levels that eroded economies of scale.

The total current local steelmaking capacity for long products is 4.25 million tonnes per annum, with the current local demand sitting at only 1.25 million tonnes.

ArcelorMittal’s Newcastle blast furnace can produce 1.7 million tonnes per annum, of which only 400 000 to 450 000 tonnes comprise the high-quality steel needed by the listed industries.

Smaller mills using scrap metal to make steel have lured many of the other customers, and the Newcastle plant cannot operate at such low volumes.

The electric arc furnace at ArcelorMittal’s Vereeniging plant has been mostly idle.

Appeals

ISF has also appealed to Minister of Human Settlements Mmamoloko Kubayi as co-chair of government’s economic sectors, employment and infrastructure development cluster (ESEID) to address the “urgent matter” of the closure of the steel plants.

“The catastrophic implications that this will have on the county’s industrialisation prospects and economic fortunes is far reaching. The consequences of this potential development require that it gets the urgent and full attention of the ESEID Cluster.

“We understand that ESEID will have a Work Session on Monday. As we suspect the closure will also be discussed there, we have prepared the attached Appeal to the ESEID to ensure the plants are not shut down in two weeks’ time,” according to the documents signed off by Van Niekerk on behalf of the ISF and the downstream steel industries.

William Murphy

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