Closure of the Saldanha steel plant by ArcelorMittal SA will have ripple effects

ArcelorMittal South Africa (AMSA), the domestic unit of the global steelmaker, has said that it was winding its Saldanha plant down and that it would be put on care and maintenance by the first quarter of 2020.

The closure of ArcelorMittal South Africa’s Saldanha Steel plant will affect roughly 900 workers – 550 of whom are directly employed by the company, with the remainder sub-contracted.

AMSA’s total workforce is 12 000. In July it said 2 000 jobs were potentially on the chopping block, so its restructuring is almost certainly not over. Indeed, AMSA said this was just the first phase of its asset review.

Despite government’s best efforts to halt the closure, which included reduced water and electricity tariffs, AMSA CEO, Kobus Verster, explained that Saldanha Steel was no longer financially sustainable.

Trade and Industry Minister, Ebrahim Patel, urged ArcelorMittal to rethink its position and consider selling the Saldanha Steel plant as opposed to shutting it down. According to Patel, national government and state-owned enterprises had attempted to work together with ArcelorMittal to avoid termination, noting that Saldanha Steel held positive industrial capacity. Patel lamented:

“ArcelorMittal should consider selling the plant to ensure the country does not lose industrial capacity and that workers and communities are not displaced.”

Verster, however, explained that ownership of Saldanha Steel would remain with ArcelorMittal.

Verster also said high electricity costs and water tariffs were not the only factors and that the changing international competitive environment had contributed to a bleak long-term outlook for the steel sector.

“Globally, the steel industry is experiencing its most challenging time since the global financial crisis. Locally, the situation is exacerbated by continued weak economic growth, especially in steel and steel-consuming sectors, with apparent steel consumption at a 10-year low,” he explained.

He reiterated that Saldanha Steel is largely an export-driven business, that had been impacted by the international market.

“With multiple factors at play, there is no easy solution and in the long-term, we don’t see any of the factors within our control changing.”

Verster said contractual domestic sales orders from Saldanha would be fulfilled by the Vanderbijlpark Works.

A miracle required to resume operations
Verster told media that the plant would retain a core staff in order to prevent vandalism and maintain the plant in a state such that it could resume operation at some point in time, if some miracle does happen.

Over the next few months, management will try to determine what type of activity can be driven from the plant to reduce the financial impact of its maintenance. This process is expected to be concluded in the first quarter of 2020.

Verster noted that the financial drain on the company is a concern, adding that “the bottom line is that we don’t have a two, three or five-year timeline to resume activity at the plant.”

Saldanha Steel produced roughly one million tons of steel a year, but had been operating at roughly 70% capacity over the last five or six months. Verster said this was the lowest production level since the plant’s doors opened in 1998.

Ripple effects
It did not take long for the ripple effects to spread through South Africa’s fraying economic pipelines.

Kumba, a producer iron ore, the key ingredient for the steel that AMSA produces has said in a statement that: “Following AMSA’s decision to wind down its steel operations at Saldanha, Kumba has reduced the 2019 total sales guidance to 41.5 to 42.5 metric tons from 42 to 43 metric tons.”

AMSA noted: “Saldanha has lost its structural competitive cost advantage to effectively compete in the export market, mainly due to raw material and regulated prices.” The latter would include power, rail and port costs, which have surged under mismanaged SOEs such as Eskom.

The company has also previously flagged weak domestic demand, which is hardly surprising. In such a low-growth environment, there will be little demand for a key industrial product such as steel.