ArcelorMittal lays bare the effect of mooted closure of long steel business

Steel major ArcelorMittal SA (Amsa) has laid bare the effect that the mooted wind-down of its long steel business will have on local economies, particularly that of Newcastle, which accounts for more than R10bn of the group’s annual procurement.

The embattled company in its annual report said the wind-down of the business that also affects the Vanderbijlpark plant would lead to significant loss of the group’s intellectual property.

“Winding down our longs business will have profound social impacts ... doing so would have a profound impact on suppliers, communities and local governments in KwaZulu-Natal and Mpumalanga. Newcastle alone accounted for 34% (more than R10bn) of our total procurement in 2023,” the company said.

Long steel products include rebar, wire rod, merchant bars, rails and sections.

Amsa relies heavily on rail monopoly Transnet to transport 91% of the iron ore and 100% of the coking coal consumed at its Newcastle and Vanderbijlpark plants.

The group, which blamed Transnet for the planned closure of the unit, in February deferred the wind-down for six months after consultation with government and organised labour.

The company at the time said the decision to delay the process was taken after commitments by the government and Transnet to assist in resolving the issues facing the business.

Short-term initiatives put in place include port and rail service improvements, which have been agreed on with the Transnet leadership alongside engagement with the government after the expiry of the steel scrap export ban in December, put the group in a good position to start a new chapter.

Stakeholders have said the upside to keeping Amsa’s long steel business open includes positive contributions to opportunities such as grid connections, value-added exports, rails and seamless tubes.

Keeping the business open will not be easy, as it has been a drag on the group’s profitability.

Since 2017, the longs business accumulated core earning losses of R527m and free cash outflow, the money left over after a business pays its operating expenses, of R4.7bn.

Optimise output

Amsa has over the years put several measures to keep the long steel unit afloat. The group in 2022 launched a long optimisation plan to focus on customer profitability, energy efficiency and footprint rationalisation.

One of the biggest features of the plan was to optimise Newcastle’s output at an efficient volume of about 1-million tonnes per annum (mtpa) and reduce fixed costs and boost productivity.

However, the group, in its annual report on Thursday, said it had become clear it would be an uphill task to make the long steel business competitive due to several factors, including a 20% drop in steel consumption and low activity in key steel-consuming sectors.

Amsa’s data shows that competitors’ domestic production capacity for long steel is about 2.7 mtpa, whereas local demand now is 1.8 mtpa.

The company said Transnet’s ongoing and sizeable under-delivery as well as electricity challenges compounded the headwinds the business was already facing.

The group’s CFO, Gavin Griffiths, said Transnet Freight Rail’s (TFR) faltering rail and port performance cost the company at least R1.4bn in 2023, comprising greater use of road transport and higher demurrage charges due to port congestion.

Between 2019 and 2022, the company’s use of road transport to bring raw materials to its plants grew 210%, while production fell 20%.

Amsa chair Bonang Mohale said the board supported the decision to defer the closure of the business by six months.

“We trust that all of our partners will grasp this opportunity and work with us to resolve and to achieve outcomes that will have hugely positive socioeconomic benefits.

“Management of the company or the longs business can’t be blamed for the decision,” he said in his letter to shareholders.

Appalling underdelivery

“Rather, we should look to circumstances over which Amsa had little or no control. The extent to which Newcastle’s prospects were undermined by TFR’s performance is now widely understood.

“We have a public sector that is making it almost impossible for business to work with TFR’s appalling underdelivery having a devastating impact on job creation and investment,” the letter reads.

KwaZulu-Natal MEC for economic development, tourism & environmental affairs Siboniso Duma previously told Business Day the mooted closure of the Newcastle plant would severely hurt the municipality’s revenue base.

Mohale said business must be at the forefront on insisting on ethical leadership, as the country heads to general elections in May.

“The closure (we all hope, temporarily) of once flourishing businesses such as Newcastle Steel Works, Amras and Vereeniging should serve as a clarion call for citizen activists demanding an end to inaction, inertia, corruption and misguided, even uninformed policy.”

With Michelle Gumede

Khumalok@businesslive.co.za