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The South African downstream steel industry is calling on government and ArcelorMittal SA to prevent ArcelorMittal closing down by finding immediate solutions that will allow the continued operation of the steel giant’s three plants that make up its long steel business in South Africa.
ArcelorMittal announced in November that it is embarking on a process to wind down its long steel business due to current low market demand and national constraints beyond the company’s control, such as the extreme challenges in logistics and energy supply, as well as steel-related policy decisions that create an uncompetitive and unlevel playing field against its local competitors.
In response, over 20 industry associations, including three scrap recycling associations and industry experts, held a crisis meeting last week to determine an urgent plan of action to prevent the imminent closure of the plants.
The industries at the summit included construction, automotive, mining, electro-technical, electricity transmission, aero and defence, rail, wire, fasteners, concrete reinforcing, cladding and roofing and rail. Most of them depend on ArcelorMittal as the only local producer capable of supplying the bulk of their required long product steel input.
The downstream operations are a critical part of the South African steel supply chain and according to a recent estimate by Steel and Engineering Industries of Southern Africa (SEIFSA), it currently offers direct employment to around 270 000 people (around 90% of total local steel industry employment) in a process that begins with mill-produced basic materials and ends with finished goods sold to local and international consumers.
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At the summit Kobus Verster, CEO of ArcelorMittal, repeated previous assertions that the company’s main request is a level playing field, that the company is offered the same tariffs on energy and transport as other producers and that existing policy interventions on scrap metal are removed as they give an unfair advantage to local scrap-based mini mill competitors.
According to an industry expert, a key contributor to the uncompetitiveness of the South African steel industry is the considerable over-capacity in local long steel production. The total current local steelmaking capacity for long products is 4,25 million tonnes per year with a current local demand sitting at only 1,25 million tonnes.
The expert says this will be exacerbated by substantial additional capacity from mini mills that are currently supported by government funding. The mini mills exclusively use scrap steel for their iron content.
“Due to the capacity, capability and quality constraints of the mini mills, the formal downstream industries can only use a very limited quantity of the mini mills’ output, making the general and informal industries the main clients of the mini mills,” Neels van Niekerk, CEO of the International Steel Fabricators of South Africa, says.
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ArcelorMittal’s 1,7 million tonnes per year Newcastle blast furnace is currently the only local mill capable of producing long steel from iron ore. The company’s Vereeniging electric arc furnace has further capacity of 0,25 million tonnes per year and produces high quality and speciality steels from scrap. However, this plant is currently idled to enable the company’s Newcastle furnace that cannot be switched on and off like a mini mill to meet the bulk of the long steel demand.
The long steel requirements of the formal downstream that only the ArcelorMittal mills can supply equates to about 35% of current local demand of about 400 000 to 450 000 tonnes.
Van Niekerk says it is a well-known fact that the ArcelorMittal facilities historically enjoyed a substantial market share of the other 65%, but this was significantly eroded in recent years since the implementation of the Scrap Price Preference System (PPS) in 2013, favouring scrap-based mills.
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The purpose of the intervention was to regulate exports to guarantee an affordable supply of quality scrap metal to safeguard employment and 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.
Despite evidence that the policy intervention had not achieved its desired outcome by 2016 and in fact parts of the scrap-processing industry is experiencing a 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 due to the support of the PPS, Van Niekerk says.
“The current investment exposure of the Industrial Investment Corporation (IDC) in the scrap smelting industry is alleged to be over R14 billion, with R3,3 billion 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.”
A scrap recycling association presentation to the summit estimated the nett subsidy to scrap smelters since 2013 is around R50 billion. The subsidy is not borne by the scrap recycling industries but directly passed on and borne by the legitimate owners of scrap, including the downstream industry.
Van Niekerk says as would be expected in an over-supplied market, the drop in demand coupled with the ever-growing but highly subsidised capacity in the past decade has already led to many casualties and the imminent closure of the ArcelorMittal plants are not likely to be the last.
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“The unanimous agreement among the downstream steel associations is that the impact of the imminent ArcelorMittal plants closure would be devastating, not only for the local steel and manufacturing sectors, but for the entire country.”
Several industry associations warned at the summit that the resulting steel shortages from this decision will likely lead to almost immediate production stoppages at many downstream plants over a wide range of dependent sub-industries and could even lead to the closure of industries that are completely reliant on the supply of long steel from ArcelorMittal.
According to a submission by a major local automotive original equipment manufacturer, the closure could set its localisation programme back by at least seven years with the loss of about 7% of its unique local steel content and put at risk current localisation plans to localise a further 30 000 tonnes of steel-based components, as well as loss of confidence by its international principals and assembly line stoppages.
The automotive industry currently consumes around 70 000 tonnes of ArcelorMittal long product per year and the knock-on effect from loss of local related sub and full assemblies is estimated at around R35 billion per year. In the short-term, it is expected to affect around 30 000 jobs in the automotive industry.
“It is almost impossible to estimate the exact losses over the medium to long term but, due to the anticipated domino effect, it could result in hundreds of thousands of job losses and billions of rands lost to our economy,” Van Niekerk says.
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