Arcelor-Mittal sets clear targets for policy change if they are to survive

Newcastle’s steel plant, a critical component of ArcelorMittal South Africa (AMSA), faces an uncertain future. Severe financial losses and adverse market conditions have prompted AMSA to set a deadline of September 30th to determine the plant’s viability, reflecting broader economic challenges in South Africa.

AMSA reported a loss of one billion rand over the past six months, driven primarily by its long steel division, which includes the Newcastle facility. Sales volumes fell by 11%, and prices dropped by 7%, resulting in a 17% revenue decline. Despite this, AMSA has maintained a neutral cash position by divesting non-core assets—such as property and obsolete dumps—and adjusting working capital, a strategy that has kept the company afloat amidst persistent earnings losses.

The global steel industry is in crisis, with prices at historic lows for two years. In South Africa, domestic steel consumption has declined by 18% over the past seven years, while capacity has expanded by 40%, creating a significant oversupply. The long steel market, which supplies construction and infrastructure, has been particularly affected, with demand stagnating amid slow economic growth.

The Newcastle plant, focused on long steel products, faces acute difficulties. Competitors enjoy a 35% cost advantage due to a scrap metal policy, undermining AMSA’s competitiveness. Additionally, inefficiencies in the state-owned rail operator Transnet have forced AMSA to rely on road transport for 62% of its raw materials, incurring higher costs and contributing to road infrastructure deterioration. This reliance stems from Transnet operating at just 35% of required capacity, a decline attributed to issues like cable theft and equipment shortages.

State-owned enterprises exacerbate AMSA’s woes. Eskom’s high electricity costs further erode profitability, while Transnet’s inefficiencies inflate logistics expenses. Broader policy missteps, including a lack of enforcement on tariffs and historical mismanagement—epitomized by corruption linked to entities like the Guptas—have compounded these challenges, leaving industrial players like AMSA bearing disproportionate burdens.

Sustaining Newcastle requires targeted interventions, those which are realistic under the current regime are limited: reducing the scrap discount to 10%, lowering Transnet’s transport tariffs from $28 to $18 per ton, and negotiating more favorable electricity rates from Eskom. Such measures could enable the plant to break even, positioning it to capitalize on any future demand recovery. The Industrial Development Corporation (IDC), a government entity, is funding losses until September 30th while assessing options, but time is running short.

Closure of the Newcastle plant would eliminate 3,500 direct jobs and could indirectly affect up to 80,000, including downstream industries, suppliers, and even local businesses like kindergartens and B&Bs. Government studies highlight that the social cost of closure far exceeds the financial support needed to maintain operations, underscoring the stakes for a country already grappling with high unemployment.

If Newcastle shuts down, AMSA plans to pivot to its flat steel business, which serves automotive and piping sectors and offers a more viable product range. The company would monetize non-core assets, such as the SANA steel plant, to reduce debt and fund investments in core operations, addressing neglect caused by prior financial constraints.