ArcelorMittal: What is eating South Africa’s steel sector?
Steel giant unveils major restructuring plan to cope with growing challenges at home, and abroad.
ArcelorMittal SA has become the latest victim of the South African steel industry’s downward spiral.
In its July trading statement, the company says it expects to report a headline loss of at least R596m (US$43m) for the six months ending in June.
- That’s after reporting a headline earnings of just R54m (US$3.9m in 2018)
- Large-scale restructuring puts over 2,000 jobs on the line
- The number of positions affected is subject to a formal consultation process
The steel firm is expected to divulge more details after releasing it half-year results at the Johannesburg Stock Exchange next week.
ArcelorMittal says it’s facing significant domestic challenges, including high electricity, rail, port, and primary raw material costs in South Africa.
“There is under-utilisation of capacity, poor inventory levels and increasing intermediate costs,” explained Michael Ade, chief economist at the Steel and Engineering Industries Federation of Southern Africa(SEIFSA). The industry body analyses trends in the steel sector
- “We have revised our growth forecast downward from 1.8% to 1.6%. But that is based on production only, and we are not taking into consideration all the other issues that the sector faces. These include the introduction of the carbon tax, rising electricity prices and low investment sentiment. Those are the constraints that are weighing down the sector domestically,” said Ade.
China: Benefactor and Competitor
Downsizing announcements are commonplace in South Africa, and this is no different in the steel sector. This is in stark contrast to the early 2000s, when steel was among the beneficiaries of the China-fuelled commodities super cycle.
- That all changed in 2009, when recession hit the world economy and China’s run as the global growth engine came to an abrupt halt.
The latest threat to SA steel is the US-China trade wars.
“There will be oversupply from China, which will be in search of other markets, since it cannot access the US. That oversupply will find its way into Africa, and this is where the stiffest competition exists,” according to Ade.
United States: Tariff barrier
The United States has recently lifted trade restrictions on steel and aluminium from Mexico and Canada. South African firms are struggling to compete.
- “Those markets are close to the US, so there are no added logistical costs and their exports will be cheaper as a result,” said Ade.
As big steel firms like ArcelorMittal brace for the impact of regional and international developments, smaller businesses are likely to experience the next wave of shocks.
“We are most worried about smaller businesses, most of which will go under quietly because the spotlight does not fall on them,” he says.
Developing countries like South Africa may need to roll out major infrastructure projects to advance its economy. And the steel industry wants to be part of talks with government to drive the agenda.
“We want to ensure that this infrastructure is channelled to the proper areas. At key points, for example, it would help to improve the infrastructure at the border post, which would reduce waiting times for exports to other African countries. The African Free Continental Trade Area is here, and we expect that South African companies are going to benefit in terms of trade with other African countries,” says Ade.
Bottom line: South African steel will need to look for new markets, beyond the US and China, while staving off domestic pressures to survive.