Crisis-hit AMSA

CANNOT

 be allowed to win at all costs

First published in BusinessDay on 5 November 2024

by Neva Makgetla

Suppose in The Great British Bake Off participants could throw sand in other competitors’ cake mix. They might win, but the culinary world as a whole would lose, and it wouldn’t help the show with its viewers.

This approach kind of describes ArcelorMittal SA’s (Amsa) latest round of demands: it wants to win by raising costs for its competitors — local mini steel mills and importers — rather than by upping its own game. It might work for Amsa in the short run, but it would ultimately drag down both the steel value chain and the economy.

Amsa is undoubtedly in a crisis. It made losses in seven of the past 10 years. Its steel output tumbled from 6-million tonnes in 2006 to less than 2.5-million in 2023, while its costs per tonne doubled in real terms from 2018 to 2023. Its market share in SA shrank from 75% in the mid-2010s to 40% today.

In flat steel products, imports now make up a third of local consumption; in long steel, new mini mills, which produce steel mostly from scrap, account for more than half of local sales, with imports at under 10%. In these circumstances, Amsa’s market value has fallen under R2bn, though it values its physical assets at about R8bn.

Amsa argues its competitors enjoy unfair advantages in the form of subsidies for Chinese steelmakers and measures to hold the cost of scrap for domestic mini mills below international levels. It proposes higher tariffs and eliminating the preferential price system for steel scrap, so it can increase its market share without cutting costs. Of course, this strategy would also mean higher steel prices for downstream manufacturing, construction and infrastructure.

If the government doesn’t act, Amsa threatens to cut 3,500 jobs, including 1,500 permanent positions at its Newcastle plant. Instead, it would risk jobs in the mini mills, which employ about 5,500 people. A bigger challenge is that Newcastle provides high-quality steel that the mini mills cannot supply.

We should turn Amsa’s diagnostic on its head. The real problem is its excessive costs, especially for iron ore. The fundamental rationale for local steel production is SA’s cheap, quality ore and coal. But that advantage is irrelevant if prices to domestic steel mills track global markets instead of domestic mine costs.

Until the early 2000s, the former Iscor plants owned their own mines. They lost these assets when they were acquired by ArcelorMittal. That left Amsa vulnerable to the vagaries of international steel prices. In the late 2010s, it contracted lower-cost iron ore and coal suppliers, but their prices tracked global markets, which spiked sharply in the early 2020s.

Ultimately, unless SA steel has access to cheap inputs, it cannot win against overseas steel producers that have greater capacity, to source iron and coal worldwide, and already produce on an enormous scale. In contrast to Amsa, the mini mills get local scrap at cost and now rank among the most competitive producers in the world.

As a result, they have been able to compete for export markets, as well as reducing the share of imports in long steel consumption in SA. By contrast, Amsa is in the most expensive quartile of steel producers worldwide. Its exports fell from 2.5-million tonnes in 2005 to just more than 1-million in 2019, and to under half a million in 2023.

Cutting input costs should make it easier for local steel to compete with imports. However, it will not resolve the problem of overproduction in long steel. SA demand is about 1.8-million tonnes, but installed capacity is 2.7-million. Proposals to boost public infrastructure investment won’t make much of a dent on that shortfall.

The decision about which producers should survive the current crisis should be taken on the basis of what is best for the national economy, not in response to heavy-handed lobbying and threats.

Neva Makgetla is a Senior Researcher at Trade & Industrial Policy Strategies.

For more information:

NEASA Media Department

media@neasa.co.za