The time for corporate welfare in the steel industry is over

The announcement on 11 November that ArcelorMittal South Africa (AMSA) intends shutting down its plant in Saldanha Bay, Western Cape, is another blow to our ailing economy. This will lead to a further 900 job losses – something the economy can ill afford with an unemployment rate of 29.1%. It exacerbates the damage of 2,000 job losses announced by AMSA in July 2019.

It doesn’t help for Minister of Trade and Industry Ebrahim Patel to ask the company to sell it to a competitor rather than shut down. Rather, the industry at large requires reform.

The shortcoming of statistics is that they tend to reduce human lives to mere numbers. The reality is that the majority of breadwinners in affected communities are left hopeless, with no idea of where their next meal will come from. This is what should matter to our politicians and government officials. However, one cannot escape the fact that these job losses are largely the result of a lack of meaningful macroeconomic reform.

For far too long AMSA has been the beneficiary of corporate welfare by the government. This includes customs and safeguard duties (currently set at 22%), government bailouts and restrictive legislation designed to protect AMSA’s monopoly over the steel industry. This has allowed for a situation where a company that is not price-competitive makes use of outdated production methods and produces goods of poor quality to enjoy insulation from the prevailing market forces.

The irony is that the AMSA is not even a South African-owned entity, but is headquartered in Luxembourg and owned by Indian national Lakshmi Mittal.

How does this revelation find harmony with the government’s local procurement mantra? It is clear that this is a prime example of corporate welfare gone wrong. As we’ve seen with other monopolies in our economy, such as Eskom, Transnet and the SABC, they simply do not work. They are only successful in raising prices and diminishing quality. How many times do we need to repeat the same mistake in order to learn? In the DA, we believe in a competitive, market-orientated economy in which the state maximises competition and lowers barriers to entry, and does not prop up harmful public or private monopolies.

What the steel industry needs is a comprehensive rethink; it cannot be business as usual. Therefore, I argue that the minister and his team need to compile a masterplan similar to that in the automotive industry, with a detailed plan put forward to structurally reform the industry.

The strategic intent behind this masterplan needs to look towards gradually opening up the steel market to new entrants and focus on the downstream sector, which employs at least 100,000 people. This is where real growth can take place in the industry, but it requires access to competitively priced steel and steel that is regularly available – everything that AMSA has failed to do as a virtual monopoly. Below are several ways in which this can be achieved:

First, I would commission the incentives administration within the Department of Trade and Industry (dti) to investigate possible financial and non-financial incentives for new market entrants. This could take the form of cut rates on bulk services such as water, electricity and freight over a prescribed period of time in order to lower input costs. In respect of non-financial incentives, the department could facilitate training and knowledge sharing relationships with international industry captains.

Second, it is imperative that AMSA is put on terms: where there are obligations (made to the government) that have not been fulfilled, decisive action should be taken. This implies that if AMSA does not follow through on its committed capital spend of R4.64-billion on upgrading its plants in line with international best practice then it is penalised through the removal of certain incentives and benefits.

Furthermore, the government needs to demand that AMSA plays open cards in the sense that it makes public its re-evaluation process in which it has designated the closure of certain plants. These plants then need to be put on auction to potential investors who will be required to upgrade these facilities with the support of a blended finance arrangement.

Lastly, where job losses occur, the department in collaboration with the downstream steel sector needs to assess where opportunities exist for AMSA employees to be reintegrated into the employment market. However, this cannot be expected to happen unless more support in terms of minimising regulatory burden and providing increased incentives to the downstream steel sector is assured. Therefore, it is critical that the Downstream Steel Industry Competitiveness Fund (DSICF) is adequately capacitated in terms of both financial and non-financial support so that it can begin to play a role in restructuring the industry.

These steps need to be implemented in order to move towards the ideal of a refreshed, competitive steel industry. The DA will continue to argue for an industry that is able to provide price-competitive and better quality steel. There is no doubt that steel is a critical component in infrastructure development and is a key driver of economic growth. However, the path forward needs to be inclusive and market-orientated — the time for corporate welfare is over. DM