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ArcelorMittal prepares for final decision on long-steel operations

ArcelorMittal SA (Amsa) expects to make a final decision by August on mothballing its long-steel operations,  with 3,500 direct and contractor jobs at its Newcastle and Vereeniging plants in the balance.

CEO Kobus Verster warned that the company’s turnaround was challenging amid a depressed long-steel market in SA.

Investors have responded accordingly, with Amsa share price having fallen more than 25% in the year to date.

In November, SA’s primary steel producer sent shock waves through the economies of Newcastle in KwaZulu-Natal and Vanderbijlpark in Gauteng when it announced it was considering the closing its long-products business, which it blamed on Transnet rail freight dysfunction for runaway costs, market challenges and unreliable power as impediments to sustainable operations.

In February, the company deferred the suspension of its long-steel units for up to six months, saying commitments by the government and Transnet had bought the operations some time.

Some short-term initiatives it targeted included port and rail service improvements, which were agreed on with Transnet. Moreover, the government’s move not to extend the ban on exports of scrap steel in December put the group in a good position to start a new chapter.

Speaking to Business Day on Tuesday, Verster said Amsa was making good progress with the initiatives it had outlined to save its unprofitable division. However, the complexity of the challenges was not expected to be resolved overnight.

“We are moving forward with all the aspects but all of them are complicated issues that cannot simply be solved,” he said. “We will have to make a decision by July or August.

“Most likely the time frame of six months is adequate. We have to make a decision before that, but I can’t give you more guidance at the moment except that we are reasonably positive that we are making progress.”

Verster said that while engagements with stakeholders, including Transnet and the department of trade, industry & competition were progressing well, Amsa would not keep its long-steel business open “based on promises”.

“There are definitive agreements on the issues that were raised and we need to see some positive impact on the business, some of which we are already seeing,” he said.

The group relies heavily on Transnet to transport 91% of the iron ore and 100% of the coking coal consumed at its Newcastle and Vanderbijlpark plants. The state-owned port and rail operator is bedevilled by ageing and undermaintained infrastructure, equipment theft and corruption that has cost the economy billions of rand.

Long-steel products include rebar, wire rods, merchant bars and rails. The automotive industry consumes about 70,000 tonnes of Amsa’s long products range a year. The country’s construction, mining, electro-technical, electricity transmission, aero and defence, rail, wire, fasteners, concrete reinforcing, cladding and roofing sectors are also important consumers.

Amsa said that from 2019 to 2022, its use of road transport to get raw materials to its plants more than tripled, while production fell 20%. In the 2022/23 financial year, the company said Transnet’s inefficiencies cost the business R1.1bn, including R600m in lost sales and  R500m in lower efficiencies and higher operating costs.

Recently appointed group CFO Gavin Griffiths said Amsa was undertaking cost-saving initiatives in all areas of the business, from raw materials to energy and logistics to achieve competitiveness, rather than selling assets.

“Closing assets is something that does not fit well with a company such as this,” said Griffiths. “The assets that we have are unique, certainly in Africa. We need to be able to leverage that benefit, particularly targeting those aspects of developmental policies in the country, be it automotive, renewables or mining.”

Griffiths was appointed effective April 1 after acting in the position since July after Siphamandla Mthethwa’s brief stint in the role.

Amsa is attempting to turn the business around at a time when the long-steel market is depressed, making things even tougher, Verster said.

“Unfortunately, in the same time period that we are trying to improve the performance, the longs market in SA is just horribly depressed,” he said.

Domestic overcapacity and persisting cost and price pressures have squeezed margins,  which has been compounded by weak GDP growth and low demand for steel as a result of the slow rollout of the government’s infrastructure plan.

Besides financial pressures from enforcement of duties, cheap steel imports and the unavailability of rail, Amsa is penalised for not making the required amount of iron ore available to Vanderbijlpark and Newcastle even though that was Transnet’s fault, said Verster.

“If they don’t supply the trains to deliver that to the two sites, surely they must be penalised,” said Verster. “You can’t have a penalty only one-sided.”

If the plan to save the long-steel business gets the go-ahead in the months ahead,  further initiatives would include longer-term iron ore supply contracts to lock in prices,  value chain efficiencies and targeted investments to replace imports.

Stakeholders have said the upside to keeping Amsa’s long-steel business open includes the opportunities offered by new grid connections, value-added exports, new rail tracks and seamless tubes.

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