When AMSA closes – What then?

Gerhard Papenfus, Chief Executive of the National Employers’ Association of South Africa (NEASA), weighs in on what it will take to save South Africa’s ailing steel industry.

ArcelorMittal South Africa’s (AMSA) 2017 financial statements has yet again emphasised the fact that South Africa will have to adopt a different approach if we want to industrialise, and as a result, save our Steel Industry.

The recent release of AMSA’s 2017 financial statements was preceded by various puzzling interventions by Government, since 2015, all aimed at saving AMSA – to the detriment of the Steel Downstream.

Prior to 2015, Government clearly understood the negative impact of duties on downstream manufacturing. As a result the Minister of Trade and Industry, a number of years ago, withdrew the 5 percent protection AMSA enjoyed at the time.

This all changed in 2015 after the meeting between the foreign owner of AMSA, Mr Lakshmi Mittal, and president Zuma, which resulted in a Black Empowerment deal. Which undertakings were given in return for which material advantages? The outcome is embroiled in suspicion and speculation. The introduction of 10 percent custom duties and a further 12 percent safeguard duty followed soon thereafter.

The introduction of custom duties in 2015 were subject to the following conditions: no price increases were to occur, there were to be price decreases, AMSA had to make substantial investments in upgrading its mills and no retrenchments were to take place. According to the notice, should AMSA fail to comply with any of these conditions, it would result in the immediate review of the duties.

Even though AMSA failed to comply with some, if not all of these conditions, the International Trade Administration Commission (ITAC) refuses to review the introduced custom duties. ITAC initially declined to disclose the basis for their refusal to review the duties, claiming confidentiality. Processes to obtain this information are currently underway.

After AMSA failed to prove the dumping of steel by China, AMSA proceeded to apply for 30 percent safeguard duties. AMSA was eventually awarded 12 percent safeguard duties; this after ITAC’s initial finding of safeguards being ‘not in public interest’ was altered to being ‘in public interest’, without any change in the underlying facts. ITAC has, thus far, refused to disclose reasons for their 180 degree about-turn.

The Steel Downstream is severely prejudiced by paying 22 percent more for imported steel; this is notwithstanding the fact that AMSA’s steel is of inferior quality, high quality steel required in certain circumstances is not available at all and AMSA is guilty of a poor record in terms of on-time delivery. Despite the increased price of imported steel, AMSA’s 2017 financial statements released in January 2018 still reveals a loss of R5.1bn, with the auditors cautioning “…a material uncertainty which may cast significant doubt on the Group’s ability to continue as a going concern…”. During the 2017 financial year AMSA’s debt also increased with R6bn. This is a full-blown lose-lose scenario.

Should AMSA’s foreign owners at any given point decide to pull the plug on its South African operations, it will trigger a very difficult phase for the Downstream – especially with the 22 percent import duties currently in place. Although it may be argued that AMSA International won’t do this, the question is, why won’t they? If AMSA International had any loyalty towards South Africa, they would have invested some of the billions they have already taken out of the country in a modern steel mill, giving the Steel Downstream access to local, cost effective, high quality steel.

Unless AMSA invests in a modern steel plant, prominent Industry role players simply don’t see any long term role for AMSA in South Africa. Apart from causing hardship to the Steel Downstream, causing the further de-industrialisation of the Steel Industry, resulting in job losses, protectionist duties will not bring about AMSA’s salvation. Even if it does, which is unlikely, the price for the Steel Downstream will simply be far too high. Even if AMSA adapts to a market dictated dispensation, its demise is also inevitable in the light of their production cost being substantially higher than the world average. Therefore, unless AMSA implements the above mentioned, the closure of AMSA’s South African operation is not a question of ‘if’ but simply ‘when’.

Realising the harm caused to the Downstream as a result of the duties, AMSA’s outgoing CEO suggests the introduction of duties to protect the Downstream against the importing of finished products, precipitated by the introduction of the current duties protecting AMSA. Duties on finished products is not the solution though; it will simply increase the burden of red tape and increase the purchase prices for consumers in general. This is  always the result of protectionist duties: when it is implemented in one area, continuous adjustments have to be done elsewhere as unintended consequences present themselves. The solution would rather be the creation of an infrastructure under which South African manufacturers can be competitive.

In order to reverse the current process of de-industrialisation, the Steel Downstream must be afforded access to cost effective, high quality steel from wherever it can be sourced. For this to materialise, all import duties on steel will have to be repealed.

The repealing of duties may trigger a decision by AMSA International to close AMSA’s local steel mills, which appears to be inevitable in the long run. It is unlikely that AMSA International will tolerate its loss-making South African operation much longer. The Steel Industry will have to get used to the idea of not having a local liquid steel producer. Although this will most likely cause temporary disruptions and uncertainty in the local Downstream, it is something the Downstream will have to adapt to and manage.

If AMSA wishes to remain in the South African Steel Industry, they will have to invest, with money taken out of South Africa, in a new steel mill, providing the local Steel Downstream with affordable top quality steel. If they don’t do that, they have no right to any role in the South African Steel Industry; they have no right to claim a stake in the local steel market at the expense of the Steel Downstream.

Government is encouraged to review its position on protecting AMSA at the expense of the Steel Downstream and to invest in the infrastructure to efficiently transport steel from our ports, especially when steel is imported.

This opinion piece is by Gerhard Papenfus, Chief Executive of the National Employers’ Association of South Africa (NEASA). He writes this in his personal capacity.

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