Johannesburg - South Africa’s steel industry is on the ropes, forcing what looks like a desperate reversal of the frosty relationship between government and ArcelorMittal SA.
It is not alone as the world’s primary steel sector reels from a global oversupply of steelmaking capacity.
ArcelorMittal this week confirmed it was considering closing its century-old Vereeniging steel works, while Evraz Highveld Steel, which is already in business rescue, intends to retrench half its workforce.
At ArcelorMittal, 1 200 jobs are on the line, and about 1 200 more are due to get cut at Evraz while the company seeks bidders for its assets after running out of cash.
According to metal workers’ union Numsa, the bloodbath is radiating out beyond the main steel mills with trader Macsteel also proposing 600 retrenchments.
Trident Steel recently let 700 workers go.
ArcelorMittal CEO Paul O’Flaherty, gave a sombre media briefing on Thursday about the potential restructuring of the Vereeniging steel works.
As had previously been leaked to the Sunday Times, he announced that ArcelorMittal was talking to the government for wide-ranging protection against Chinese competition.
ArcelorMittal wants South Africa to set import tariffs on steel at the maximum bound rate of 10%-15% for various subcategories of products. The bound rate is the maximum a country is allowed under its commitments to the World Trade Organisation.
If the process of reviewing the tariffs can be accelerated, that would also be great, said O’Flaherty.
The company is also looking for more stringent anti-dumping duties on particular steel products, which requires investigations and takes months to put in place.
ArcelorMittal also wants the state to boost demand by finally making steel a designated input – meaning there would be a minimum local content requirement on infrastructure projects.
The fact that steel has not yet made it on to the designations list has been seen as an indication of the government’s animosity towards ArcelorMittal.
The plea for protection might mark a belated crossroads in the traditionally acrimonious relationship between the former state-owned steel monopoly and the state.
The company is “really poor at transformation” and is ready to talk about so-called developmental steel prices, O’Flaherty told journalists, adding that it was still not clear exactly what a developmental price entailed.
Demands that ArcelorMittal lower its domestic prices have dominated state planning around steel for more than a decade.
The Vereeniging steel works are already on borrowed time, while ArcelorMittal will make a call on its future at the end of next month – depending to some extent on what the state is able to do to help, said O’Flaherty.
Lakshmi Mittal, CEO of ArcelorMittal SA’s Luxembourg-based parent company, has been in South Africa and is meeting Cabinet members, he said.
O’Flaherty denied that ArcelorMittal was trying to force concessions with the threat of economically devastating Vereeniging.
“We’re not putting a gun to their head. We are bleeding and it needs to stop. We’ve been making losses for five years,” he said.
ArcelorMittal has set the end of August as a deadline for evaluating the options before very possibly issuing a section 189 notice at Vereeniging – the legal requirement for a mass retrenchment.
O’Flaherty calls the “unabating surge” in Chinese steel imports part of a “fundamental structural change” in the steel market.
Official trade statistics put the steel and iron imports from China at about 240 000 tons in the first five months of last year.
In the same five months this year, South Africa imported 489 000 tons from China – more than double last year’s number.
The company is also suffering from the global drop in iron ore prices – something it derives zero benefits from due to its contractual relationship with Kumba Iron Ore on a cost-plus basis.
According to Henk Langenhoven, chief economist of the Steel and Engineering Industries Federation of SA, any tariff relief for primary steel production would need to be replicated all the way down the value chain, otherwise it would just add costs to the wider sector to protect one company.
“It’s no use protecting one and hurting everyone else,” said Langenhoven.
The heavily subsidised steel from China includes products all along the value chain anyway, he told City Press.
Langenhoven also calls the current situation a “structural” problem. “This is not cyclical,” he added.
Although South Africa boasts most of the steel capacity in sub-Saharan Africa, ArcelorMittal’s output of about 6 million tons a year is minuscule in the context of the 300 million to 400 million tons of superfluous steel capacity in the world today.
Steel capacity is standing idle all over the world.
Early this year, Chinese utilisation rates were estimated at 74.2%, while the rest of the world’s steel mills combined were using about 68% of their capacity, according to the World Steel Association.
The average global profit margin on steel was estimated at 0.5% last year.
South Africa’s steel production is sitting at more or less the same level as it was in 1998 – a full 38% lower than the high point in 2007, according to the manufacturing index produced by Stats SA.