OREN KAPLAN: Government needs to protect the entire steel sector

ArcelorMittal is pushing for government intervention — at the expense of rival local steelmakers and the broader SA steel industry — in a desperate bid to save its struggling long steel division. 

This most recent call for government intervention has reignited debate over the future viability of SA’s steel industry. What should not be overlooked in this discussion is that the local steel sector includes both legacy producers such as ArcelorMittal that contribute heavily to global emissions, and modern, greener players that use scrap steel in a far more environmentally friendly manner to produce what is known as long steel.

Government policy needs to take the entire sector, including smaller players (which collectively constitute about 75% of local long steel capacity), into account in a comprehensive well-thought-out strategy, rather than respond in a whack-a-mole manner to the loudest voice in the room. 

The announcement last year that ArcelorMittal’s Newcastle long steel operation was earmarked for closure shocked MPs, and the steelmaker found the government receptive to its pleas to change steel policy. More recently, ArcelorMittal again urged the government to rapidly intervene in the steel sector and reduce electricity, rail and port prices, while abolishing export taxes on ferrous scrap metal — a tax that is essential to the operational sustainability and export potential of local steel players, ArcelorMittal’s direct competition.

This tax also generates billions of rand in revenue to the fiscus, benefiting all South Africans. By asking for the elimination of the export tax on scrap metal ArcelorMittal is trying to increase the input costs for rival steelmakers and by doing so reduce or squash all local competition.

At the heart of the issue is an oversupplied global and domestic steel market, where fierce competition and historically low prices have left legacy companies struggling to survive. ArcelorMittal’s older operations, burdened by inefficiencies, high levels of pollution and high production costs, means it is finding it difficult to compete in producing long steel, a product that includes bars and wire rods, used largely in mining and construction.

The company has sought government action to dismantle policies it incorrectly believes are contributing to its woes. ArcelorMittal posted losses before the scrap tax was implemented and yet was profitable for a period when the scrap tax and other measures were in place. This makes its stated position that it needs the tax removed nonsensical, especially when the removal of the scrap tax will threaten the very survival of the scrap-consuming companies that supply three quarters of the long steel product in SA. 

What’s missing from the narrative on the steel industry is the role of SA’s independent private long steel producers, the “mini mills”, which operate more efficiently, sustainably and are greener. These smaller firms, such as Scaw and Cape Gate, together employ more than 3,000 people and benefit from some of the policies ArcelorMittal seeks to overturn. Using scrap steel as a cheaper, greener input, mini mills are better aligned with global trends towards sustainability, making them competitive in both local and export markets. 

These smaller operators are able to survive thanks in part to a tax on scrap steel exports, which makes local scrap available to producers for further beneficiation, thus sustaining thousands of jobs and ensuring a far more environmentally sustainable production process. It is precisely this scrap tax that ArcelorMittal is calling to dismantle. But we do not think the survival of ArcelorMittal’s Newcastle mill (or indeed any of its other plants) should be contingent on eliminating local competition.

The SA government has repeatedly said it supports a vibrant industrial sector, and now it faces a pivotal choice. ArcelorMittal's Newcastle operations may be in jeopardy, but policy decisions should not be made in a way that sacrifices smaller, sustainable long steel players in the name of propping up a single outmoded and heavily polluting company.

This is especially so given that since the advent of democracy the government has laudably sought to move away from the apartheid-era focus on creating monolithic primary producers of raw materials, to rather encourage the beneficiation of raw materials across a range of different players in the market. Having a range of modern long steel firms and mini mills (which the government helped fund) producing a greener product is to the betterment of the SA economy and the government’s stated beneficiation efforts.

While we therefore agree with ArcelorMittal that lower-cost electricity and rail is essential, we oppose the call for the elimination of the export tax on scrap metal. Were this tax abolished it would lead to thousands of jobs losses at mini mills across SA, and ArcelorMittal would still present the government with a raft of other challenges due to its historical structure and origin as a monopoly during apartheid.

ArcelorMittal’s entire economic structure was designed in the pre-war era through to when sanctions were in place over 30 years ago. As a result, it is an anachronism considering the demands of a modern industrial economy that thrives on competition, green production processes and open borders. 

From China to Italy there is a move away from a reliance on blast furnace steel producers using iron ore as raw material input. By favouring ArcelorMittal above all other steel producers, the government would in effect be protecting the most polluting part of the steel economy and threatening the green part of the steel economy.

The government must resist the temptation to respond to each steel crisis in an ad hoc manner when the crisis boils over into media headlines. Instead, it should craft a forward-looking steel strategy in consultation with all role players in the steel sector. This strategy should balance the needs of large and small producers alike, ensuring the long-term sustainability of the entirety of SA’s steel industry and the jobs it provides.   

• Kaplan chairs Cape Gate.