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A year ago, ArcelorMittal SA (Amsa) CEO Paul O’Flaherty gave the country’s major steel mill in Vanderbijlpark nine months to go unless something improved radically.
The Vanderbijlpark works are still there and may even survive until the flood of cheap, subsidised Chinese steel dries up – somewhere within the next three to five years.
On Friday, O’Flaherty announced the basic elements of a rescue plan that had seemed impossible a year ago.
The ministers of economic development and trade and industry, Ebrahim Patel and Rob Davies, respectively, have committed to getting a 10% tariff levied on all steel entering South Africa by January.
By March 2016, there will be additional anti-dumping duties, adding between 30% and 60% to the price of major imported steel products.
This is by far the most crucial state intervention to save the local steel industry, but the process for instituting duties like these usually takes up to two years.
These massively expedited trade protections represent a radical about-turn in the long history of animosity between the state and the formerly state-owned steel monopoly related to its alleged practice of import-parity pricing.
On Friday, Amsa announced another key part of its survival plan: an enormous R4.5 billion rights issue that will be completely underwritten by the controlling shareholder, the Luxembourg-based ArcelorMittal group.
Most of this money, R3 billion, will be used to pay debts owed to ArcelorMittal companies and the rest to buoy Amsa. This might increase ArcelorMittal’s shareholding even further if other shareholders baulk at paying the group’s debts to itself, but the full sum is guaranteed.
In another coup, Amsa this week struck a new iron ore deal with Kumba Iron Ore. For the past two years, Amsa has been suffering the consequences of a cost-plus-20% ore contract that has turned out to be possibly the worst deal imaginable.
The cost of ore in terms of this contract has far outstripped the cost of simply importing the stuff, due to a collapse in international iron ore prices. Amsa has paid R450 million more for ore than it would have if it had been importing instead.
As of this week, the two companies announced, Amsa would be paying Kumba export-parity prices.
In another show of support very pointedly denied to Amsa earlier, government will shortly be scrapping the strange exclusion of steel in its local-content rules for infrastructure projects.
While Amsa’s Vereeniging steel works were being shuttered, costing another 223 jobs, unions had agreed to a plan to try to place all of those workers elsewhere, saidO’Flaherty.
Though the state appears to have come to Amsa’s rescue, O’Flaherty is well aware that a debt is being incurred.
“Government is being very supportive and will ensure we compete on a level playing field,” he said.
“But how will we ensure that steel producers do not revert to charging whatever they want when conditions return to normal?
“We have progressed well with discussions about this,” he added. “There has to be a pricing model that forces us to be competitive. We have progressed well with reducing our costs.”
Despite all these interventions, there was only bad news in the quarterly report Amsa released on Friday.
The company’s headline loss this year is expected to be R6 per share – 1 100% worse than a year earlier.
Impairments of R1.5 billion will be notched up due to the closing of the Vereeniging facility and the Thabazimbi iron ore mine.
