There is a danger that the closure of Saldanha Steel will pressure the government into granting additional tariff protection to its owner, ArcelorMittal SA (Amsa), further harming downstream producers while only delaying the primary steel producer’s demise.
Last week, Amsa announced that it would wind up its Saldanha plant due to high raw material costs, unaffordable electricity, port and rail tariffs, and a collapse in domestic steel consumption. The latter is just 70% of what it was in 2008.
A last ditch-attempt by the government to save 900 jobs at the plant by offering water and electricity tariff concessions has not been enough to stay Amsa’s hand. The company is considering retrenching up to 2,000 workers across its SA operations.
To support Amsa, the government introduced two tariffs on various imported steel products in 2015 and 2017. The International Trade Administration Commission (ITAC) is currently considering additional tariff measures at Amsa’s request.
However, downstream, value-adding steel producers are up in arms, as they and their customers have been paying for Amsa’s tariff protection with firm closures and job losses of their own. The tariffs have reduced their competitiveness by preventing them from paying the best prices for imported steel.
They fear that the closure of Saldanha Steel will pressure ITAC into sustaining these tariffs and granting additional protection to Amsa, further harming downstream activity and only delaying the primary steel producer’s descent.
Southern African Institute of Steel Construction CEO Paolo Trinchero says government’s tariff-only approach "is clearly not working", and it must look harder at what is necessary to sustain the broader industry, not just one or two large companies.
"Without looking at the downstream sector as a priority we could end up just kicking the can down the road," he says, noting that downstream producers have experienced job cuts way in excess of the 2,000 Amsa is looking to shed.
According to Stats SA, 22,661 jobs were lost in SA’s total steel manufacturing sector (a drop of 14%) between the first half of 2012 and the first half of 2019. Of these, roughly 12,000 were shed in the structural metal products subsector and another 10,000 in the basic iron and steel subsector — a drop of 25% in each case.
"To give Amsa electricity subsidies indicates that something is clearly wrong because it means as a country we’re becoming uncompetitive," says Trinchero. "The whole economy needs a relook."
A survey undertaken by Mike Schüssler of Economists.co.za for the National Employers Association of SA bears this out.
It finds that though Amsa enjoys one of the lowest raw materials costs in the world (largely due to relatively cheap iron ore from Kumba and scrap metal), its basic steel selling prices in 2017 were 18% higher than the global average and 27% higher than those of the world’s biggest producer, China.
Despite this, Amsa’s operating profitability ratio (ebitda to sales revenue) was just 0.9% in 2017 against a global average of 12.2%. In fact, Amsa’s operating margin averaged a mere 0.4% between 2012 and 2017, resulting in an average loss of 0.9% over this period.
"This clearly shows that Amsa has an efficiency problem as costs other than raw materials — such as electricity, labour, inputs, maintenance and other operating expenses — must, by implication, be among the highest in the world," Schüssler concludes.
He estimates that in SA one worker produces roughly 23t of crude steel per hour, (or 51t using only the basic iron and steel workforce), compared with 263.7t in China, 139t in India and 35.5t in Malaysia.
According to Schüssler, China’s high labour productivity is a factor of better technology, fewer electricity supply and labour disruptions, and higher economies of scale achieved from younger, much bigger plants that run on 24-hour shifts. (Some of Amsa’s plant is 70 years old, whereas 80% of global steel is produced in mills that are less than 15 years old and use far more energy-efficient technology.)
"It’s all very well for government to say we’ll give you a discount on the water, but all administered prices — electricity, rail, water, rates and taxes — have increased tremendously, making it very difficult for our guys to compete," says Schüssler.
However, making local downstream producers pay tariffs on the products of the world’s more efficient producers just passes Amsa’s high costs and inefficiency up the value chain, he concludes. The former are penalised not just with a loss of market share as they are priced out of export markets, but also with a loss of local market size as domestic demand declines.
But surely if Saldanha Steel, at the end of a dedicated railway line in a deep-water port and protected by tariffs, can’t be run sustainably, then it must be asked whether SA can afford a primary steel producer at all?
Macsteel CEO Mike Benfield thinks it would be crazy for SA not to have one, given that it has the raw materials in abundance. However, he, like other downstream producers, will continue to oppose Amsa’s tariff applications in order to remain competitive themselves.
The bottom line, he says, is that "SA needs an efficient [primary] steel producer at the end of an efficient rail link at the end of an efficient power line".
Until Eskom and Transnet are overhauled, these conditions will remain unmet and the sustainability of Amsa — and the entire industry — will remain in doubt.
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