Hard as it is to believe, when Paul O’Flaherty gave up as Financial Director at Eskom, he jumped from the frying pan into the fire. O’Flaherty left to become CEO of steelmaker ArcelorMittal, one of the few local businesses with even worse economics than South Africa’s beleaguered electricity utility. In a recent address to GIBS, which we have transcribed with the video below, O’Flaherty provides the context for why the JSE-listed company he runs, is in such deep trouble: South Africa steel producers have no import duty protection. That opened the floodgates for dumping into the country by heavily subsidised steel producers from China, its BRICS partner. Today’s Bloomberg story will add to O’Flaherty’s concerns – and deepening fears of Value Investors who’ve been piling into ArcelorMittal shares in the belief its setback is temporary. In the first six months of the year Chinese steelmakers offset sliding domestic demand by raising exports a staggering 28%. Presumably a slice of that came into South Africa. Being such a bosom buddy of China’s comes with costs. Among them, it appears, the likely death of its steelmaking. A capability established as part of the State’s strategic industrialisation imperative more than 80 years ago. – Alec Hogg  Â
(Bloomberg) – Crude-steel production in China shrank 1.3 percent to 410 million metric tons in the first half compared with the same period of 2014, according to the National Bureau of Statistics on Wednesday. June’s output fell 0.8 percent from a year ago.
After decades of rapid growth spurred an unprecedented expansion in steel supply, output is now dropping as mills in China contend with a property-led slowdown, overcapacity and losses. The country’s producers are the linchpin of the global industry, accounting for about half of supply, and the slowdown is hurting iron ore demand. Growth in Asia’s largest economy held at 7 percent in the second quarter, beating expectations.
Construction is slumping as policy makers seek to shift the economy away from investment-led growth toward consumption. The amount of land purchased for real-estate development fell 34 percent in the first six months, official figures showed. About 35 percent of China’s steel demand is related to housing and construction, according to Goldman Sachs Group Inc.
Iron ore imports by China, the world’s largest buyer, shrank 0.9 percent to 452.9 million tons in the first half, customs figures showed on Monday. Prices that rose as China expanded are falling to a so-called new normal level and will remain there through 2020, Rio Tinto Group said on Monday.
Mills in the China Iron & Steel Association reported losses of 16.5 billion yuan in the first five months as demand stalled, Chairman Zhang Guangning said Thursday last week. Steel output in China probably peaked in 2014, according to the association.
Output of steel products rose 2 percent to 559 million tons in the first six months from a year earlier, the statistics bureau said Wednesday. Given the domestic slowdown, mills have been increasing overseas sales, which climbed 28 percent to 52.4 million tons in the first half, customs data on Monday showed.
Paul O’ Flaherty, CEO of ArcelorMittal, talks at GIBS on the history of the steel industry and the challenges it faces.
The South African steel industry is fundamental to manufacturing in South Africa. It has a proud history. The first steel factory was set up in Vereeniging, the Union Steel Corporation, in 1912. The history of steel is that it’s actually built this country and if you go back in the history that steel and electricity, it kind of started together, Eskom and Iscor, actually by the mining industry, who wanted to make sure, that they could control their own costs and their own inputs, to be competitive. It seems like we go full circle, back to where we started.
If I talk just a little bit about ArcelorMittal, but I talk for the steel industry (I think), is that we supply about 65 percent of the local steel required in the country, and we have about 80 percent of the capacity. Directly – we have 40 thousand jobs, in terms of the people who work for us and in terms of the contractors, who work direct for us. Downstream – about 60 thousand jobs that we create, so it’s about 100 thousand jobs, purely out of ArcelorMittal, and if you add the knock-on, all through the steel industry, it’s a lot more. ArcelorMittal also adds about one-point-four percent to the GDP of the country, and then the steel industry a lot more than that.
It’s our firm belief that steel is integral to the future of the country. It’s our firm belief that without the steel industry, you will not have a competitive manufacturing industry, and you certainly won’t be able to drive the National Development Plan. In terms of 2014, in terms of the raw material inputs that we had, we beneficiated the raw materials to the tune of R22b in South Africa – that was our value-add, in terms of what we do.
Let’s go back to the National Development Plan because that’s the fundamental, to drive the manufacturing industry, so the National Development Plan, which plots out to 2030, says that we need to increase GDP, two-point-seven times to about five-point-four percent per annum. We need to increase capital spend, as a percentage of GDP, to 30 percent, from the current 17 percent, and we need to create 11 million jobs. It’s a good plan, but we’re currently sitting in a very distressed state, not only in the entire manufacturing industry but also in the steel industry itself.
The steel industry in South Africa – South Africa consumes (last year) about just under five million tons of steel but because of the strikes, we had significant strikes – Seifsa strikes – but we also had mining industry strikes, but if you equate it to 2030, and the growth plan of South Africa. South Africa’s steel consumption in that growth plan says ‘we need steel consumption of about 13 to 14 million tons in South Africa’. In a country that can produce, with us and everybody else, about six-and-a-half million, so massive opportunity for this industry to create jobs. To create downstream beneficiation and treat the raw materials of South Africa in an appropriate manner, rather than export them, but the entire industry is in crisis (the steel industry) and it’s really tough on South Africa, with a five million ton market.
The global steel capacity is two-point-two billion tons of steel per annum. That’s the steel capacity. One-point-six-billion is what actually is produced, so there’s an overcapacity in the market of 600 million tons. Of the one-point-six billion produced – China is half, 800 million tons, so of the entire capacity they’re half. The entire production they’re half.
Sub-Saharan Africa’s demand for steel, Sub-Sahara, is 40 million tons, two steel producers in Africa, (South Africa and Egypt) – 13 million tons. Last year’s exports from the Asian countries and from those other countries who export it, with over capacity, was around 300 million tons of steel, making its way into various markets, including ours.
There has been significant action from many-many countries, particularly in the last 12 months, but going back two-and-a-half years, against China and against Asian countries. In 2012, there were 25 anti-dumping and countervailing cases laid against the Asian markets. In 2013 – 25, and in 2014 – 31 (anti-dumping). This quarter there’s been five in the first four months of the year, or the first three months of the year.
In addition to anti-dumping, there have been many-many safeguard duties that approximately 60 to 65 countries have implemented within the last year. Safeguard means put in a duty now and check whether we actually have dumping going on. Because the Chinese steel industry is very important to China. In July 2005, their National Development Reform Commission wrote effectively, their white paper on the steel industry, and it is heavily, supported by Government, it creates a significant amount of jobs, so it’s important.
But their steel that is hitting our shores today, and hitting African shores, and remember, South Africa has no import duty on any primary steel – zero percent. The steel that hits here today from China – it is one thing to be competitive against China. It’s another thing to be competitive against a subsidised product, so the research that has been done is that China’s steel industry is supported firstly, by preferential lending, from state owned banks. Electricity below cost. Raw materials below cost. Export credits, so an encouragement of exports. Tax rebates. Refunds of property taxes. Research and development subsidies – all from Government. We must remember, out of their total capacity, most of it is owned by state owned companies in China, so it’s a massive, massive threat on this country and on this industry.
