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R/€ = 16.32 Change: -0.01
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‘Poor citizen’ AMSA promises to mend ways as it seeks support to save Vereeniging and company

23rd July 2015 BY: Terence Creamer
Creamer Media Editor
ArcelorMittal South Africa CEO Paul O’Flaherty
Photo by: Duane Daws
ArcelorMittal South Africa CEO Paul O’Flaherty

South Africa’s largest steel producer ArcelorMittal South Africa (AMSA) gave notice on Thursday that it was weighing the partial or full closure of its Vereeniging Works, in southern Gauteng, and would make a decision on the plant’s future by the end of August. At the same time, CEO Paul O’Flaherty acknowledged that AMSA had been a “poor citizen” and that it would need to change its ways if it was to receive the government support it required to survive the prevailing hostile market conditions.

The Vereeniging mill is the country’s oldest steel plant, having begun operations in 1911 as Union Steel Corporation of South Africa, and employs 1 200 people, of whom 840 are permanent employees.

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The announcement of its possible closure – which coincided with a trading statement indicating that the company would make a headline loss per share in the half year to June 30 that could be as much as 1 400% worse than the 2c/share loss incurred during the corresponding period last year – came amid widespread distress in the local primary steel sector.

The country’s second-largest producer Highveld Steel and Vanadium entered business rescue in April and more recently announced a temporary halt to operations at its eMalahleni mill, as well as consultations that could result in the retrenchment of 1 089 of its 2 240 employees.

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O’Flaherty stressed that closure would be a last resort and that the intention was to “fight” for the plant’s survival and for the retention of jobs. However, in the context of weak domestic demand and a surge in “subsidised” import competition, particularly from China, where there was significant overcapacity, AMSA had to “stop the bleeding” and did not have an “open cheque book” in light of five consecutive years of losses.

The Vereeniging Works, which was able to produce 400 000 t/y of mostly specialised steel grades, was already on short time and was producing to about one-third of its capacity – the larger AMSA group had the capacity to produce 5.5-million tons across facilities in Vanderbijlpark, Newcastle and Saldanha Bay.

PROTECTION CALL

But in the absence of tariff protection AMSA was undertaking an industrial-footprint review, which could result in the mothballing of certain of its Vereeniging plants and placing others under care and maintenance. Similar reviews might be necessary at the other operations should the situation worsen, but O’Flaherty stressed that there were no immediate fears about the company’s status as a going concern.

The internal focus was on cost cutting and efficiencies, notwithstanding headwinds relating to rising electricity prices and the fact that its cost-plus iron-ore procurement agreement with Kumba Iron Ore meant that there was no direct benefit to the company as a result of the recent sharp decline in iron-ore prices to around the $50/t level.

In parallel, the JSE-listed group was also seeking tariff protection and had already submitted three applications to the International Trade Administration of South Africa (Itac), which would adjudicate whether an increase in tariffs to the “bound” rates of between 10% and 15% was justifiable in the current circumstances. South Africa currently applied no duties on primary-steel imports.

AMSA’s first application, dealing with zinc-coated galvanised steel sheets, aluminium zinc-coated steel sheets and painted- or plastic-coated steel sheets, was submitted in June last year and Itac told Engineering News Online that it was finalising its recommendations, which would be submitted “in due course” to Trade and Industry Minister Dr Rob Davies.

The other two applications were submitted earlier this year and O’Flaherty said others would be submitted before the end of July. It was also considering antidumping applications for wire rod and reinforcing bar, but O’Flaherty indicated that that process was likely to “take a very long time” to conclude. Therefore, the immediate focus was on the application of protection to bound levels allowed for under South Africa’s World Trade Organisation obligations.

AMSA calculated that 1-million tons of South Africa’s apparent 2014 demand of around 4.9-million tons had been supplied though imports, but that the figure could rise to 1.3-million tons this year if the performance of the first half of the year were to be repeated in the second six months.

O’Flaherty stressed, however, that its request for support from government, which was receiving a “sympathetic hearing”, would have to be balanced with commitments from the steel industry to improve operational efficiencies and “fair” pricing.

POOR CITIZEN

He said AMSA had been a poor citizen in the areas of transformation and pricing and that it was taking active steps to remedy the situation.

It had made proposals to a panel of steel-industry experts established by Economic Development Minister Ebrahim Patel to deliberate on the developmental pricing model and was also pursuing various strategies for improving its broad-based black economic–empowerment (BBBEE) rating, including through a possible equity transaction.

However, the BBBEE initiative were entirely “separate” from the group’s current engagements with government on the pricing formula and on protection, with O’Flaherty flatly rejecting suggestions that it was a case of “tariffs for black economic empowerment”.

Instead, the emphasis was on finding a pricing formula that was reflective of the steel sector’s “strategic” nature in an economy that was keen to industrialise further. Such a formula would protect the industry in the difficult times, but ensure fair pricing to consumers when markets turned favourable.

“When you are a strategic company you cannot then say ‘I’m here purely for profits’ – and we agree with that.  We are saying that, even in the good times, the days of making 30% to 35% margins is not right,” O’Flaherty outlined, adding that the conversation was currently focused on what an appropriate pricing model was for steel “in the good and the bad times”.

As part of the trade-off on pricing, AMSA would also seek government regulations stipulating that locally made steel be used in public infrastructure projects, which was not the case currently.

In fact, until recently government had even been hostile to the suggestion, arguing that the monopoly steel industry should face even higher levels of competition. Besides sustaining zero protection, government had even been actively championing the creation of a steel competitor and had been actively courting the Hebei Iron and Steel Group, of China, to partner with the Industrial Development Corporation on the development of steelmaking capacity based on the raw material available near Phalaborwa, in Limpopo. 

EDITED BY: Creamer Media Reporter
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