DONALD MACKAY: Who actually gets government support in the steel sector?

ArcelorMittal SA (Amsa) burnt through R1.9bn in 2024, which I think we can all agree is a lot of money, especially for a company with a market capitalisation of R1.1bn. Its total debt was raised by roughly the same amount.

On January 6 Amsa announced, not for the first time, that it would be closing its Newcastle operation (it announced this the first time on November 28 2023, but didn’t follow through), causing a fair amount of panic.

The Industrial Development Corporation (IDC) provided Amsa with a credit facility of R1.7bn, with repayment terms to be determined, allowing Amsa to keep operating Newcastle until at least August 31 this year.

In a recently answered parliamentary question, trade, industry & competition minister Parks Tau explained that “[his department] and other relevant government institutions have been in constant engagement with Amsa stakeholders to explore initiatives and interventions aimed at saving and/or mitigating the impact of the closure of the Amsa longs business.”

Tau explained that “[i]n June 2024 [the] IDC provided Amsa with a 12 months’ R1bn working capital facility. This facility was restructured in January 2025 and there are no arrears. Furthermore, in February 2025 [the] IDC and [the department] provided Amsa with a R380m shareholders’ loan for working capital, particularly aimed at averting the closing of the longs business plant in Newcastle, KwaZulu-Natal.”

All of this money moving around has caused a bit of a kerfuffle, with the Electric Steel Producers (ESP — did they see this coming?) of SA saying “a financial bailout of the long steel operations of troubled steelmaker Amsa will further distort market conditions in a steel sector already under severe domestic and international pressure.” 

The ESP members are all mini-mills: Scaw Metals, Cape Gate, Veer Steel Mills, Unica Iron & Steel, Force Steel and Coega Steel, which make steel using ferrous scrap as feedstock. These companies, along with a few others, are the beneficiaries of enormous amounts of government largesse (or market distortions, to quote ESP).

The price preference system (PPS), gives them R6.5bn-R8.5bn in subsidies per year, plus another R500m or so of protection in the form of export duties. Oh, and add to this friendly finance from the IDC of about R14bn, so quite a lot.

When Amsa first announced the closure of Newcastle it identified three main reasons:

• In the past seven years the country’s apparent steel consumption has reduced by 20%, reflecting low market demand in key steel-consuming sectors, limited infrastructure spend and project delays, resulting in overcapacity in the market and overall weaker business confidence.
• High transport and logistics costs [and] energy prices, worsened by the well-publicised logistics failures and their resultant cost impact, and the prevailing electricity challenges which the country faces.
• The introduction of a preferential pricing system for scrap, a 20% export duty and, more recently, a ban on scrap exports, have allowed steel production through the electric arc furnaces route an “artificial competitive advantage”.

It doesn’t look like any of these problems has been addressed, though Mittal seems quite upbeat, noting in its Sens announcement of March 31 that “[t]he SA government will use the deferral period [up to August 31 2025] to expeditiously address the structural problems previously identified by [Amsa] (scrap PPS, scrap export tax, tariff measures including safeguards, and others) to put the longs business on a sustainable footing.

“During the deferral period Amsa will focus on implementing further improvements to optimise the longs business operations, enhance product offering and supply chain reliability for customers, and advance its commitment to localisation, particularly through continued collaboration with the industry, resulting in a superior performance for the business.

“Based on the engagements between Amsa and government to date, it is the company’s understanding that a more market-related and less punitive PPS and export tax on scrap dispensation will be implemented soon, and that the implementation of safeguards is imminent.”

Reducing PPS and the export tax poses an existential threat to the mini mills, which cannot survive without government support. The problem is, something has to give, and right now, and that still looks like it will be Mittal, not some of the mini mills. Is there a way for all of them to survive? No. Not even if demand surges? It will be better, but still no.

To understand why, we need to see what happened with Mittal’s prices after it received the IDC money. On April 14 Amsa put out a notice to its clients dropping its price on wire rod by 23% to R10,000 a tonne. It has no choice if it is to compete against the mini mills, which are cheaper than imports.

Doubt this? The average import price for imported wire rod was R11,631 per tonne (FOB) for the last year and only R5m worth of product was imported (434 tonnes). The mini mills, accounting for 75% of the long steel sold in SA, maintain that large market share by undercutting even imports from China, and they can do this because of the market-distorting subsidies they receive.

For Amsa Newcastle to survive will require a lot more than money. If the problems it has identified are not addressed it will burn through the money from the IDC and we will be back to square one. If government demand increases, it will be met by product from the mini mills, because the subsidies give them the ability to keep their prices low.

On the other hand, Amsa has to pay back the IDC loan, which will be burnt through even quicker this time given the steep discount it is providing on long products to simply stay in the game.

• MacKay is CEO of XA Global Trade Advisors.