South Africa’s steel industry would lose a major slice of the domestic market for long steel products if the government allowed ArcelorMittal South Africa (Amsa) to close its Newcastle plant, says Parks Tau, the minister of trade, industry & competition.
Tau said the R1.6bn cash injection for Amsa from the Industrial Development Corporation (IDC) had been approved not just to protect the 3,500 jobs at risk, but also to preserve the industry’s position in the local market.
“If you close [Amsa’s] long steel then South Africa would have to import long steel,” Tau told Business Times on the sidelines of an ANC national executive committee meeting last week.
“Of course, over time you would rebuild your long-steel capacity but you would’ve lost market share significantly. So you would have to be cognisant of that and say, ‘How do I continue to maintain market share and protect the industry in the country?’
“So if they close down long steel we’ll have to import or we have to build capacity from scratch, which would require these companies to invest over a period of a year to 18 months,” he said.
It would affect your major infrastructure requirements, both public and private, because long steel is critical for infrastructure projects, construction projects and the automotive sector, which would be hard hit
— Parks Tau, DTIC minister
Keeping the plant operational was crucial for the economy of Newcastle and northern KwaZulu-Natal, and to avoid the downstream repercussions on private sector infrastructure projects.
“It would affect your major infrastructure requirements, both public and private, because long steel is critical for infrastructure projects, construction projects and the automotive sector, which would be hard hit if you close that,” Tau said.
The construction industry needs long steel products such as reinforcement bars, structural beams, columns and steel frames. Long steel products are essential for bridges, roads and railway lines.
The state-owned IDC, whose cash injection is aimed at providing a breathing space of at least six months for the Newcastle plant, is also considering increasing its stake in Amsa.
Amsa CEO Kobus Verster told journalists the company would now focus on making the long-steel business profitable.
“We should use this time to bring the business to sustainability and profitability. That is our objective during the next six months,” he said.
Amsa has cited weak economic growth, cheap steel imports, escalating rail and power costs, and stiff competition from mini-mills as the reasons its long-steel business is in trouble.
Verster said the long-steel business could not afford to continue incurring losses or negative cash flow and that funding must be made available to allow permanent interventions to be found.
Preserving jobs is at the heart of the agreement with the IDC and the Unemployment Insurance Fund, which has approved a TERs (temporary employer/employee relief scheme) grant to fund employee costs.
“We will not do mass restructuring or reduction,” Verster said. “We will still work on the salary bill that is in terms of the pay scale and things like that. We will continue to work on things like productivity and pay scales.
“The government realised that it is a lot cheaper to prevent job losses than to fund the unemployed people through the UIF and other social means.”
Verster said the IDC planned to conduct due diligence ahead of increasing its shareholding in Amsa.
“The IDC has indicated that they have a desire to look at an increased shareholding, and for that a due diligence period has been agreed upon. It is for them to look a bit under the bonnet to see whether they want to increase and at what value,” he said.
IDC spokesperson Tshepo Ramodibe said: “The [due diligence] outcomes will inform us on the nature and extent to which we can support this business.”
The loan was repayable by agreement between the parties and “contingent on the financial performance, solvency and liquidity of the long steels business”, Ramodibe said.
The IDC loan is the latest government intervention to keep the steel plants going following the R417m that was approved under TERs last month to sustain 2,982 employees. The DTIC granted the steelmaker R380m in February, and in June last year the IDC extended R1bn in working capital.
The latest financial injection coincides with a government review of its steel tariff framework. Verster said he expected a “less punitive” pricing regime to result.
“In terms of the PPS [scrap metal preferential pricing system], I got the impression that the minister understands that the impact is much more severe on Amsa and that some normalisation is required.
“My understanding is that it is weeks away not months away. Hence the loan facility allowed these things to be implemented so that we can start to normalise profitability,” he said.
The PPS, combined with export taxes on scrap metal, was intended to make this resource available to local industries at favourable prices. But Amsa uses iron ore as its raw material, not scrap metal, which puts it at a disadvantage to its rival producers.
Verster said revised “safeguard” import tariffs for hot-rolled steel coil and plate were also imminent. “The indication we get is it could be a 13% that will reduce to 11% and 9%. It’s a three-year time frame.”
He said the overall review of steel tariffs was necessary to enhance downstream manufacturing competitiveness.
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