The closure of ArcelorMittal’s long-steel plant in Newcastle is a striking example of the government’s inconsistent economic policies. While the official stance promotes the beneficiation of raw minerals — transforming them into high-value products to maximise job creation and economic growth — the actual policies in the steel sector tell a different story.
Government interventions have disproportionately supported scrap metal use over primary steelmaking, particularly through the scrap preferential pricing system, whereby local mini-mills can purchase scrap metal at discounts of up to 40% on international prices. Additionally, the imposition of a 20% export duty on scrap metal further advantages mini-mills over integrated steel producers such as ArcelorMittal. This bias is compounded by the substantial financial support these mini-mills have received from state entities such as the Industrial Development Corp.
Of course, ArcelorMittal faces competitive threats beyond just heavily subsidised local players. The company is also contending with an influx of cheap steel from China, where weak domestic demand caused by a real estate slump has led to overproduction and subsequent dumping in foreign markets, including South Africa. In response, the South African government has implemented import tariffs aimed at protecting the local industry.
However, these measures have not proved effective as imported steel’s market share of local steel consumption has grown to about 33%. Balancing the imposition of tariffs is challenging; overly stringent measures could adversely affect downstream industries that depend on affordable steel. Moreover, as a member of the World Trade Organisation, South Africa is bound by international trade regulations that restrict the use of overly protective tariffs.
Still, all is not lost for ArcelorMittal. In contrast to the long-steel market, its Vanderbijlpark flat-steel business has several competitive advantages over mini-mills and imported steel.
It’s much more complicated than making long-steel products — for example, the chemical composition is crucial
Flat-steel products — characterised by their uniform thickness and wide, flat surfaces (available in such forms as plates, coils and sheets) — are made by casting and hot rolling and often require further processes such as cold rolling or coating. It’s much more complicated than making long-steel products — for example, the chemical composition is crucial for properties such as formability, weldability and corrosion resistance. The products are used in various specialised applications such as body panels for vehicles, building façades and machinery parts. The Vanderbijlpark facility is equipped with advanced technologies that can produce high-quality flat products with consistency in thickness and surface quality.
Long-steel products such as bars, beams and rebars are used in simpler applications, mostly construction, where the primary concern is strength. Since precise specifications are less important, these are the staple products of mini-mills, in which scrap metal is fed into electric arc furnaces that offer less control over composition. Though mini-mills can theoretically produce flat steel too, quality control is more complex due to the variable nature of scrap (impurities or contaminants can affect the final product’s properties) and the machinery’s reduced capacity for precise alloying.
The sole local competitor to ArcelorMittal’s flat-steel business is the newly established flat-steel mill of Scaw Metals in Joburg. Scaw uses scrap metal as an input, but it has invested in expensive equipment to produce thin-gauge, hot-rolled steel, previously imported from China and a product ArcelorMittal doesn’t make. The production method is more straightforward and cost-effective than that used for cold-rolled or speciality steels, but it offers less dimensional precision and results in a product with a coarser surface. It’s not ideal for something like automotive manufacture, where safety, crash performance and weight optimisation demand exact chemical compositions.
Despite the flat-steel business’s better competitive position, prices are linked to international markets, so the depressed global environment will weigh on profitability (while a weaker rand will help).
Delaying the closure of the long-steel unit has increased ArcelorMittal’s net borrowings to almost R4bn and discussions are under way to realign a R1bn working capital facility secured in 2024. Fortunately, it has a very supportive anchor shareholder in ArcelorMittal Holdings, the world’s second-largest steelmaker, so the only worry for minorities is dilution should they be unable to partake in a recapitalisation (which is being considered, according to the company).
With a market capitalisation of only R1.5bn at the time of writing, the company is a deep-value play, but it requires international market conditions to improve given its pricing model.
Ultimately, ArcelorMittal needs to protect its competitive advantage in the flat-steel business by continuing to invest in technology and the manufacture of specialised items. There is scope to replace imported products in the automotive and appliance industries and to expand its range into the renewable energy and mining sectors.
Though the longs division at Newcastle was a drag on the group, the Vanderbijlpark plant also suffered instability and outages that need to be addressed. The planned new electrical arc furnace, which will cut emissions, should help in this regard. When you face stiff competition from all quarters, peak performance is required at all times.
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