I have read and noted with great disappointment the recent media coverage in relation to the SA steel sector. Peter Bruce’s article seems to have been the genesis of the discourse, after which a response by the CEO of ArcelorMittal SA (Amsa) was published, among others (“Let’s steel ourselves for ArcelorMittal reality check”, August 22, and “Why safeguard measures for local steel industry are essential”, September 2).
This coverage has resulted in misinformation on critical steel sector issues and even transitioned into a thinly veiled lobby against the scrap policies of the government. I am taking the extraordinary step of addressing the issue in this article due to my current position and background, which I believe allows me to offer unique, and I hope balanced, insights into the issues.
I represent the downstream industry through my involvement as CEO of the Reef Group, which is a downstream steel fabricator primarily for the mining sector. I am acutely aware of the impact the upstream has on the Reef Group and the army of typically family-owned downstream fabricators competing in a continually shrinking market.
However, my professional life was formed by and at Iscor, and I dedicated more than 33 years of my life to the company. I spent two years at Newcastle and 26 years at Vereeniging. I was involved in the commissioning of Saldanha (2000-03) and was the director for flat products at Vanderbijlpark between 1999 and 2003 before taking up other group roles in the latter days of my career at Iscor. I have an intimate knowledge of the operations of Amsa, as Iscor became known.
For the past six years I have also been chair of the board of Scaw and have witnessed first-hand the return to profitably of the former Anglo American mill. I deliberately mention Scaw’s heritage to undermine the recent bias against the dismissive term “mini-mills”. In certain circles this term has come to represent inferior and charitably state-funded steel makers that are not deserving of their place in the steel value chain.
In this case it is wholly inappropriate and couldn’t be further from the truth. Contrary to conventional public wisdom, Scaw is actually older than Amsa by four years and, coincidentally, celebrates its centenary year this year. I am proud of my association with Scaw as much as I am proud of my Iscor roots.
Amsa’s decline
The greatest disservice the leadership at Amsa has paid to its shareholders and employees is to not focus on making steel. Recent results announcements have been peppered with narratives purposed to position Amsa as a victim, when in fact it has made many missteps in its recent past, which it is no longer able to plaster over. The most recent and clear example is the choices it has made in allocating capital.
One of biggest challenges Amsa faces is an antiquated process that saddles Newcastle with a cost disadvantage of about R1,250/tonne. You would be hard pressed to find a single mill in the world that still uses the process of casting blooms in the fashion Newcastle does. Leading producers globally apply the concept of hot charging, transferring hot billets directly into the roll mill from the melt shop. In an energy-deficient country, Amsa maintains a process that triples energy misuse and cost duplication.
Amsa has previously acknowledged this issue, even announcing in its 2015 results that it was in its capex plans to change the process. However, in 2014 Amsa elected to reline its blast furnace at a cost of R1.8bn instead of a billet caster, which would have resolved this issue once and for all. In the nine years since 2014 Newcastle has produced more than 11-million tonnes of steel, representing a missed opportunity of almost R14bn in avoidable costs and a tax on shareholders.
Unfortunately, this isn’t an isolated case, and Amsa has made many such counterintuitive decisions, including lack of investment in new technology and underspending on maintenance. Most recently, the toing and froing on the commissioning and mothballing of Vereeniging is incongruent with Amsa’s media statements.
On one hand Amsa decries a supposed raw material price advantage to scrap mills, yet there isn’t a willingness by Amsa to operate Vereeniging and “exploit” this supposed advantage. Simultaneously, Amsa announces plans for arc furnaces at Vanderbijlpark. This project is at least three years away, making the announcement dubious given that the earliest possible commissioning would coincide with the expiry of the very price preference system it is ostensibly being built to benefit from.
Amsa in fact enjoys a raw material price advantage compared with global steel producers and the local “mini-mills”. For the past three financial periods Amsa’s raw material basket was $93, $97 and $161 per tonne better than global prices. It is totally understandable, given this advantage, to not pivot to scrap.
Having noted all of the above, I am still confident Amsa has a leading role to play in the SA economy, and this where I differ with Bruce in relation to his article. Given the critical role Amsa needs to play, I would hope Amsa uses the windfall of cash it is likely to generate from the installation of the hot-rolled coil safeguard duties wisely. I would advocate for focused expenditure on Vanderbijlpark to upgrade it to world-class standards and return it to profitability built on operational excellence and global competitiveness.
Local beneficiation
I also believe there is a role for both Amsa and the “mini-mills”. Amsa can and will thrive in an environment that has scrap policies that support local beneficiation of scrap. I’d like to reference Bruce's article one more time, where it accurately referenced one of the opportunities identified by the steel master plan, in terms of which “initial estimates are that 200,000 tonnes (and possibly up to 500,000 tonnes) of imported final products could be replaced, generating about 800 direct jobs and adding about R7bn per year to GDP” .
The soon to be commissioned R5bn Scaw hot strip mill project is tangible evidence of the positive economic fruits of the maligned steel master plan and the government’s policies on scrap. The project will catalyse import substitution of more than 300,000 tonnes of hot-rolled coil per annum and contribute more than R4bn to GDP annually. The project will create 200 direct skilled jobs and catalyse a further 400 indirect jobs. Most importantly, none of this hot-rolled coil is currently being supplied to the market by Amsa.
The project demonstrates the fallacy that “mini-mills” are incapable of producing high-quality steel grades. Scaw is already producing high-grade steel for safety-critical applications such as steel wire rope (think of mine shaft lift hoists) for export to North America, Europe, Australia and even China (possibly the only steel in the world being imported into China as a finished product).
Its inexplicable to me that the scrap export duty and price preference system are even under discussion. This would undo much good work and momentum in developing a sustainable and alternative primary steel producing base in SA. Amsa is not exclusively entitled to SA as a market, but there is much scope for it be a leading supplier if it focuses on the main thing.
• Coertzen is chair of Scaw Metals Group.
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