How government dithering pushed ArcelorMittal to shut down steel operations

ArcelorMittal South Africa’s year-long plea for help from the government has come to naught as the company will proceed with shutting down its steel-making operations in Newcastle and Vereeniging — a move that will have a devastating socioeconomic impact. 

ArcelorMittal estimates that its decision will result in 3,500 direct and indirect job losses, affecting communities in Newcastle, Vereeniging and surrounding areas. 

Steel production at ArcelorMittal’s operations in Newcastle and Vereeniging will stop at the end of January 2025. The wind down will impact all Long steel plants, including the Newcastle Works, Vereeniging Works, and the rail and structures subsidiary, AMRAS, which relies on intermediate products currently produced at Newcastle.

For South Africa’s economy, ArcelorMittal’s decision means that there will be fewer players in the country producing long-steel products such as fencing material, rods and bars that are used in the construction, mining and manufacturing sectors. After all, ArcelorMittal is South Africa’s only primary steelmaker. 

Talks

ArcelorMittal CEO Kobus Verster and his team have been in talks with the Department of Trade, Industry and Competition (DTIC) since December 2023 to find ways of averting the closure of steel operations.

ArcelorMittal asked the department for protection measures, including an export tax relief on steel and measures to level the playing field in the face of cheap steel imports (particularly from China), and intense competition from scrap-based steelmakers, whose competitiveness has been bolstered in recent years by government policy.

Asked if he believed the government did enough to stave off the closure of ArcelorMittal steel operations and avoid job losses running into the thousands, Verster was diplomatic.

“The government is willing to listen but not able to take decisions. Could the government have done more? Of course, that is my view,” said Verster on Monday, 6 January at a press briefing. 

However, a source close to the company told Daily Maverick that behind the scenes, ArcelorMittal’s efforts to get the government’s attention and help had been “frustrating”.

Frustrations with the government behind the scenes

After months of warnings from ArcelorMittal about closing its steel operations, Minister of Trade, Industry and Competition Parks Tau intervened on 19 November 2024, when he sent a letter to ArcelorMittal requesting an urgent meeting with the company’s management. 

The meeting, scheduled for 21 November 2024 and to be attended by Tau and his department officials, was aimed at finding ways for the government to help ArcelorMittal.

“The meeting didn’t go well,” said the source, adding that Tau didn’t even pitch for the meeting he requested in the first place. “It’s like the government didn’t take ArcelorMittal’s plea seriously.”

Discussions between ArcelorMittal and DTIC officials continued well into December, but failed to yield the necessary results, the company said. ArcelorMittal’s Verster said the company informed DTIC about the company’s decision to mothball the steel operations in Newcastle and Vereeniging. “There has been no feedback from the government,” said Verster, whose company decided to inform the public and shareholders on Monday about the closures. 

Daily Maverick asked DTIC for comment about ArcelorMittal’s requests for help and the shutdown decision. Spokesperson for Tau and the DTIC, Yamkela Fanisi said the government has "noted" ArcelorMittal's decision, adding that it will have an "economic impact not only in the town of Newcastle but the KZN economy and other downstream impacts". Fanisi acknowledged that the government intervened in the matter but the intervention "was not sufficient". 

"The steel industry is the critical component in the re-industrialisation of the South African economy. Efforts will continue to be made to find solutions that will be beneficial to the economy; that will be inclusive of improving productivity, investments, technological improvements, cost of production and decarbonisation of the steel industry and the economy at large," said Fanisi.

ArcelorMittal’s announcement on Monday, 6 January on the steel operation closures, accompanied by a warning of financial losses, spooked JSE investors. ArcelorMittal’s share price finished 27.3% lower on Monday, with R1-billion evaporating from the company’s value on the JSE. 

When its annual financial results are released on Thursday, 6 February, ArcelorMittal’s headline loss per share for the year to end-December 2024 is set to widen to a range of R4.06-R4.41 from a loss of R1.70 per share a year ago. Headline earnings/loss per share is the main profit/loss measure used in South Africa and strips out certain once-off items (such as acquisitions), which might artificially boost a company’s profits instead of depicting its organic performance. 

The loss is related to the closure of ArcelorMittal’s steel operations, which in turn meant funding retrenchment packages for workers — set to cost the company about R2.7-billion. 

Factors leading to the closure of steel operations

ArcelorMittal first announced in November 2023 that it would shut down its steel operations that were performing at a loss due to Eskom blackouts, Transnet’s inability to rail goods to market and the government’s policy blunders in not protecting the local steel industry. 

DTIC introduced a new preferential pricing system for scrap, a 20% export duty and a ban on scrap exports that have given steel production via electric arc furnaces an “artificial” competitive advantage over steel manufacturers that use iron ore to produce steel. This means scrap metal traders who recycle steel are gaining an advantage over ArcelorMittal’s more intense operations such as Newcastle, which consumes heavy raw materials such as iron ore.

ArcelorMittal also blamed lower demand for steel products owing to a weak domestic and global economy.

The dysfunction of Transnet’s rail network has meant that ArcelorMittal is transporting raw materials to its factories by road, which is more expensive. ArcelorMittal relies heavily on Transnet Freight Rail to transport 91% of the iron ore and 100% of the coking coal consumed at its Newcastle and Vanderbijlpark factories to produce steel.

Electricity crisis

Then there are Eskom’s blackouts, which harm ArcelorMittal’s steel production process. Higher stages of load shedding, coupled with load curtailment, resulted in ArcelorMittal factories not having a reliable power supply for hours. This forced the company to find alternative sources of electricity at an additional cost.

Verster previously said the increase in power generation in recent months (there have been no Eskom blackouts for more than nine months) had given ArcelorMittal breathing room to improve its operational efficiencies.

However, without broader policy interventions to support the local steel industry and protect it from the influx of low-cost steel imports, Eskom keeping the lights on hasn’t moved the needle for ArcelorMittal.

“This is especially when you have an environment where steel consumption is 30% lower than eight years ago. The steel industry is under stress. There has to be specific interventions by the government to ensure that when the economy returns, the industry and manufacturing capabilities will have to be maintained,” said Verster.

For the steel business to remain operationally viable in the long term, ArcelorMittal wants, among other things, protection measures (in the form of duties) for the local steel industry against imported steel flooding the market.

The International Trade Administration Commission of South Africa has implemented a provisional safeguard duty of 9% on certain hot-rolled steel products. The commission is considering duties on other steel products, including long products.

ArcelorMittal has been calling for an import duty higher than 9%, instead suggesting 25%. Verster has argued that this percentage is justified because other countries have implemented similar levels of duty to protect their steel industries. DM