ArcelorMittal to shut Newcastle and remainder of Vereeniging operations

ArcelorMittal South Africa shares have crashed as the company announced that it is putting its major Newcastle and Vereeniging long steel operations in care and maintenance due to a lack of demand. More than 3 500 employees will be affected by the decision. Long steel products include wire, rods, railway rails and bars.

Its share price crashed almost 30% to 100 cents on the day of the announcement, but recovered some of its losses by lunchtime. It was down 7% to 127 cents in early afternoon trading. The shares have lost more than 70% of their value over the past year.

ArcelorMittal has taken a dim view of South Africa’s economy and the government’s reform agenda because its steel operations in the country are taking a big financial hit. The company swung from a R3 billion profit in the first half of 2022 to a R448 million loss during the same period this year. The toll is so enormous that ArcelorMittal has announced the closure.

The steelmaker cited high logistical and transportation costs, energy prices and load shedding as reasons for giving up the operations. This comes after years of aggressive cost cuts to save the business, which ultimately proved fruitless as South Africa’s steel consumption has declined 20% over the past seven years.

“Despite these best efforts, the initiatives were unable to counteract the cumulative effect of a slowing economy and a difficult trading environment,” said chief executive officer Kobus Verster in a statement. South Africa now consumes only 4 million tons of steel as infrastructure expenditure dwindled.

High transport and logistics costs, as well as escalating energy prices and load shedding have added further pressure. In addition, a new preferential pricing system for scrap, a 20% export duty, and a ban on scrap exports have given steel production via electric arc furnaces an “artificial” competitive advantage over steel manufacturers, beneficiating iron-ore to produce steel. This means scrap metal traders who recycle steel are gaining an advantage over the company’s more intense operations that consume heavy raw materials such as iron ore.

“These structural market issues are beyond ArcelorMittal South Africa’s control and do not appear capable of being resolved in the foreseeable future,” said the company.

The company also acknowledged the potential negative impact on the regional and local economies in which the mills were located, in particular the Newcastle Works, which was a major source of economic activity and jobs in the KwaZulu-Natal town.

The company said the wind-down would exclude the coke batteries at Newcastle, which would remain operative, producing metallurgical coke for use at the Vanderbijlpark Works, and for sale of commercial market coke to the ferro-alloy industry.

“The ArcelorMittal South Africa board and management have reached this point after having exhausted all possible options. As difficult as these circumstances are, we have a duty to ensure that the business remains sustainable in the long term, in the interests of the company and its stakeholders. The remaining business, after the wind down, will be substantially more profitable and able to invest the appropriate capital in product development and available growth prospects,” Verster said.

The group has also been vocal about the negative impact of the collapse of the Transnet Freight Rail service, which has been particularly acutely felt at the Newcastle Works, which is located far away from its sources of raw materials.

Solidarity said the ArcelorMittal South Africa announcement was a signal that government’s mismanagement of State enterprises such as Eskom and Transnet, as well as its inability to promote economic growth, were now “claiming victims”.