Defend Truth

Opinionista

While the people are desperate for jobs, the country is rapidly deindustrialising

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Bonang Mohale is chancellor of the University of the Free State, former president of Business Unity South Africa (BUSA), professor of practice at the Johannesburg Business School (JBS) in the College of Business and Economics and chairperson of The Bidvest Group, ArcelorMittal and SBV Services. He is a member of the Community of Chairpersons (CoC) of the World Economic Forum and author of two bestselling books, Lift As You Rise and Behold The Turtle. He has been included in Reputation Poll International’s (RPI) 2023 list of the “100 Most Reputable Africans”. He is the recipient of the 2023 ME-Vision Academy’s “Exclusive Recognition in Successful Leadership” award.

ArcelorMittal South Africa is acutely aware of the severe consequences of winding down the Long Steel business on the economy and in particular, on employment in SA.

Winding down the ArcelorMittal South Africa (AMSA) Long Steel (Longs) business would have severe impacts on South Africa’s engineering manufacturing and other sectors, with total job losses estimated at up to 120,000 and further damage being inflicted on the already fragile manufacturing sector.

Some 450,000 tonnes of the country’s current local demand of 1.7 million tonnes cannot be supplied other than by AMSA’s Longs. The ongoing congestion at the nation’s ports means that importing these supplies is not a viable short-term option.

One sector that would be particularly hard hit by a closure, is automotive, which consumes some 70,000 tonnes of Longs business outputs. Seventeen suppliers would be directly impacted by closure with seven at risk of closing and four having to reduce operations. A wind-down will set the automotive industry’s localisation programme back by at least seven years with the loss of some 7% of its unique local steel content.

In the short term, around 30,000 jobs in the automotive sector will be impacted, including suppliers and backward linkages, with this impact growing in the medium to longer term.

Since 2019, AMSA has assessed, in the utmost detail and with the deployment of high-level internal and external expert resources, the Longs business’s effects on the company’s overall financial sustainability. This process repeatedly identified the substantial drain on profitability that Longs represented. In particular, we noted how Longs’ losses have hamstrung our ability to invest in capacity to produce value-added steel.

Longs legacy

Historically, Longs held an approximately 60% share of its markets but with the emergence of scrap-based electric arc furnaces, by 2023 this had dwindled to approximately 44% (33% in the case of Newcastle). Approximately 70% of the Longs market is for what are essentially commodity products including sections, rebar and wire rod. In addition to Newcastle, the Longs business consists of plants in Vereeniging and AMRAS, based in eMalahleni. These businesses produce more specialised, higher-value products, which include special bars, tubes, heavy sections, rails and higher-quality wire rod. In these non-commodity segments, the Longs business enjoys a 60% market share. Due to market segmentation and the need to run Newcastle’s N5 blast furnace at minimum production volumes, to achieve viable economies of scale, it is necessary for AMSA to participate in both the commodity and non-commodity markets. This means, in essence, that we are unable to focus only on those higher-value segments in which the Longs business enjoys a more sustainable market share. For several years our management has implemented numerous sustainability interventions aimed at bolstering profitability and, at a minimum, reducing Longs drain on profitability.

These measures have included, amongst others, the Value Plan Programme adding R2.1-billion of EBITDA savings to the Longs business since 2018 — although these were substantially eroded by inflation/market movements, lack of plant reliability and interruptions in raw material and electricity supply as well as other “abnormal costs”; restarting and subsequently acquiring AMRAS; closing the Pretoria small section mill to increase Newcastle’s bar mill utilisation; completing an interim restoration of blast furnace N5 in 2022 at a cost of R480-million; supplying all of Newcastle’s lump iron ore requirement from a contract that had been secured at beneficial prices and introducing heat treatment to improve the attractiveness of seamless tube exports.

In Q4 2022, we launched a long optimisation plan to focus on customer profitability, energy efficiency and footprint rationalisation. In addition to a number of other measures, the Longs optimisation plan sought to, optimise Newcastle’s output at an efficient volume of approximately one million tonnes per annum; increase the rail product range; further localise automotive steels and replace imports of forged products; integrate into selected high-added-value product niches; make selected investments into the Tubular plant and secure value-added export sales and reduce fixed costs and boost productivity. This year we continued with the long optimisation plan and supplemented it with a mill-centric strategy to secure particular high-value niche markets or expand existing ones. This envisaged Newcastle operating at an optimal output of one million tonnes per annum. We also scoped high-return capital expenditure on selected parts of Newcastle which, it was hoped, would deliver short-term but significant EBITDA gains. At the same time, it was decided to defer a decision on commissioning an electric arc furnace in Newcastle, originally planned according to our Decarbonisation Roadmap to come online in 2034, and to continue operating the newly restored blast furnace N5 and aggressively market Longs leadership in quality and reliability with a renewed focus on improving our customer service. These efforts were premised on the expectation that domestic scrap prices would normalise, boosting the competitiveness of our Longs business. As the year unfolded, however, it became apparent that this would not occur and that scrap pricing would remain depressed by the ban on exports — which, in December 2023 was subsequently not renewed. At the same time, competitors invested even more in capacity.

These multiple, concerted and coordinated efforts were unable to counter the adverse effects of economic malaise and a drop, over seven years, of 20% in apparent steel consumption and low activity in key steel-consuming sectors combined with poor investor sentiment; Transnet’s ongoing and sizeable under-delivery as well as electricity challenges; substantial overcapacity in the long steel segments, resulting in depressed pricing; and persistently uncompetitive billet cost versus local competitors and a mounting free cash flow drain!

Longs business wind down

In 2023 some three-quarters of Newcastle’s sales were loss-making as measured by margin contribution and on an EBITDA basis, this figure was even higher. There being no realistic likelihood of an improvement in the prospects of our Longs business and given the inter-connectedness of its various parts, the board reluctantly decided, in November, to wind down the Longs business as the continued operation of Newcastle, AMRAS and Vereeniging put at risk the sustainability of the company. The announcement of this decision explained that the winding down would be the subject of a due diligence exercise and a consultative process with the broader stakeholder community (key customers, suppliers, organised labour and government. In January we reiterated that initiatives implemented to date, were not sufficient to counter the combined effects of, among others, a slow economy and difficult trading environment including low demand; national constraints beyond the control of the company, in particular, the high transport and logistics costs as well as energy prices, exacerbated by the well-publicised logistics failures and their resultant cost impact, and the electricity challenges which the country faces and scrap advantage over iron ore with respect to steel production as a consequence of policy.

Since making the November announcement, we engaged with stakeholders including government [represented by, among others, the Ministers of Trade, Industry and Competition (DTIC) and Department of Public Enterprises (DPE), Transnet, the Industrial Development Corporation (IDC)], numerous industry associations, organised labour, customers, suppliers and community forums. This broader stakeholder community asked what was needed to change the wind-down decision. We reiterated that we do not need any preferential treatment or subsidies but rather require government to ensure a level playing field for South Africa’s primary steel producers by addressing structural constraints. These engagements have been both positive and constructive but finding solutions to the structural challenges mentioned is complex and reversing the wind-down decision would pose substantial risks to the sustainability of the company. At a minimum, such a decision requires the commitment of all stakeholders.

Wind down deferred 

In February we announced that we were deferring the wind-down to allow for continued operation for up to six months. We disclosed that specific short-, medium- and longer-term interventions had been identified — some of which were set out in the Steel Master Plan— to address the constraints facing the Longs business in particular. The short-term initiatives that are now being progressed include, among others, working on port and rail service efficiency improvements with a Transnet leadership that has demonstrated its firm intent to cooperate with the company — to narrow the current cost gap, with an undertaking to work together towards addressing further cost optimisation opportunities; continuing to engage with government on concerns regarding steel scrap which, among other issues, threaten the existence of small and medium-sized scrap entrepreneurs and traders.

Read more in Daily Maverick: Deferring closure of SA steel factories is no election ploy, says ArcelorMittal boss

This is a first step towards addressing those policy measures which give an artificial cost advantage to lower quality scrap-based steel makers, to the disadvantage of integrated steel-making facilities that beneficiate mined raw materials (specifically iron ore); expediting demand-side opportunities to improve capacity utilisation in the absence of economic growth, as envisaged in the Steel Master Plan, to replace imports and facilitate exports. This includes anticipated projects which require investment to increase the local application of high-quality steel profiles; agreement with key customers to longer-term volume commitments and localisation efforts to create sustainable local supply and enlarge the downstream manufacturing capability to the benefit of both local manufacturers and the Longs business and working with key suppliers, service providers and organised labour to reduce the cost structure of the Longs business.

Although the short-term initiatives do not fully address the structural shortcomings highlighted before, AMSA has confidence that the deferral of the wind-down decision, enabling the Longs business to continue to operate for a period of up to six months, combined with the commitment from many of the company’s affected partners, will provide enough time to cement and implement the agreed medium and longer-term interventions. These interventions, among others, focus on longer-term iron ore pricing, value chain efficiencies to improve customer service and value offerings, targeted investments to improve cost competitiveness, enable value-added exports and aid the transition to greener steel.

We have indicated that, if the Longs business, in its previous model prior to the announcement of possible closure, were to be wound down, the company would be on a more sustainable financial footing. However, should the anticipated benefits from the short-term interventions noted above be realised, the entire company, including the Longs business, will be more sustainable. The trajectory of the Longs business after the expiry of the six-month extended operations period may result in either its continued operation, the introduction of a partner/partners to pursue joint venture opportunities or the resumption of an orderly and commercial wind-down.

Our leadership remains acutely aware of the severe consequences of winding down the Longs business on the economy and in particular, on employment. We noted that the timing of the wind-down deferral was subject to these in-principle agreements being commercially and contractually concluded. We continue to monitor closely our working capital requirements over the six-month deferral period, to ensure that there is sufficient access to liquidity.

However, we have considered it prudent to apply for an additional working capital facility of up to R1-billion which could be called upon to support continued operations. DM

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  • Fanie Rajesh Ngabiso says:

    Turn OUR South Africa around. Get rid of the ANC. Vote DA.

    (to those who’ve seen me say this before and find it annoying – these are desperate times and I’m going to keep repeating it until all the people of our country wake up and realize that race is irrelevant and service delivery and rule of law everything. And to those who agree with me, please stop bickering over individual detail, focus on the big picture and spread this simple message: “Vote DA”. You will be helping to save our country for all law abiding citizens – of all our gorgeous shades.)

    • District Six says:

      Come on now, you’re just posturing conveniently. Please take your message to one of the populist daily’s and use a vernacular language of the people. Here at DM, you are virtue signalling to the choir in the easiest way possible and with the least effort. You must know that changing the way people vote is hard work, beyond being a “keyboard warrior”.

  • Robert Pegg says:

    Every business has to adapt to changing circumstances, and the steel industry has to do the same. Many large industries in other countries have to rely on government support to continue operations. This has to be measured by the effect on job losses and the subsequent loss in tax revenue.
    Politicians all seem to agree in their manifestos, that job creation is one of their primary goals, but how can this happen in the state the world economy is in ? Who will want to invest in a country like SA when there are so many better choices for investors ?
    Any business looking to expand in SA has to contend with outdated bureaucracy and red tape. Business tax rate is too high at 27% compared with Mauritius at 15%. My business has been waiting over 12 months for a VAT refund. We have now had to submit the same documents we previously submitted and wait for another audit. The amount of over R750,000 is still owing and many small businesses cannot afford to carry this amount of debt. We will not purchase equipment from SA suppliers and pay VAT in the future.
    The banking system needs to be more efficient regarding foreign currency receipts and payments. It takes far too long to process payments to overseas suppliers compared to banks in the UK who allow same day internet payments. I am fortunate to be a British citizen and have business accounts with a bank in the UK. I also have the same type of accounts with a bank in SA, but avoid using these accounts whenever possible. To have to get Reserve Bank approval for some payments does not work in the 21st century business environment.
    Wake up SA before its too late.

  • Walter Spatula says:

    I guess that’s what happens with a misguided fool as minister of trade and industry. #VoetsekANC.

  • Rob Wilson says:

    I was part of team of engineers building mines in the 1980’s and 90’s in South Africa. Virtually all comsumables and short life equipment was sourced and repaired locally. A single day visit to Boksburg and down the road to Vereeninging would be enough to check on the progress of things as diverse as winder hydraulics and braking systems, assembly of very large electric motors and locomotives. What has changed? The raw materials are still here. Government policy has killed the swan that lay the golden eggs, and the skills have decided to pay tax elsewhere.

  • District Six says:

    If this is true, we could see our arcelor sooner than we imagine. SA simply cannot afford the implosion of the steel industry upon which so many others depend downstream. But then the railway infrastructure, Transnet Ports… really, it’s big trouble ahead. The government seems to be operating with parallel structures. Let’s not have a Minister of Steel too. #MakeANCHistory

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