UNDICTATED: Why steelmaker AMSA forced into 35% downsizing. Hint: Eskom, Transnet.

This week’s shock announcement that South Africa’s dominant but loss-making steelmaker Arcelor Mittal is cutting its 10,000 workforce by 35%, is a case of gradually….then suddenly. For the past five years, this one-time major exporter has been pleading for sanity from Pretoria. With ever-growing problems at Eskom and an imploding Transnet, AMSA is now being forced to close the gigantic long steel plant at its Newcastle Works, which will lead to laying off over 2,000 of the 3 500 affected group-wide. It is a massive blow for the KZN town where AMSA is easily the biggest private sector employer. In this episode of UNDICTATED, BizNews’s Newcastle-grown editor Alec Hogg gets the what’s, why’s and how’s from AMSA chief executive Kobus Verster.

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Relevant timestamps from the interview

  • 00:00 – Introductions
  • 02:02 – Kobus Verster on the recent announcement by Arcelor Mittal
  • 03:29 – On the scale of the retrenchment
  • 04:05 – On the relative importance of long steel production
  • 06:35 – AMSA’s competition
  • 07:54 – On making the business sustainable
  • 09:10 – What will be left after long steel products are removed
  • 10:27 – What will happen to the Newcastle plant
  • 11:42 – How many employees will still have jobs
  • 13:08 – On running a business with level 6 load-shedding
  • 16:58 – On the future of the business
  • 19:34 – How the business can save on electricity
  • 20:51 – Concludes

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An edited transcript of the interview between Alec Hogg and Kobus Verster

Alec Hogg: In this episode of UNDICTATED, we talk to Kobus Verster, the Chief Executive of Arcelor Mittal South Africa (AMSA). A shock announcement yesterday will surprise those who haven’t been following developments at AMSA. The long steel operations in my boyhood town of Newcastle and in Vereeniging at those two mills may be shut down, subject to an ongoing investigation.

But if you’ve seen our financial results for the year over the six months ending June, it shouldn’t be a surprise. In this episode of UNDICTATED, we delve into the details of what’s happening and why. The chaos at Eskom and Transnet is severely impacting manufacturers and major industries in South Africa. Kobus, it’s good to be talking with you again. The last time we spoke, we were in the studio in Johannesburg. Much has changed since then. You were riding the crest of a wave, but then came massive load shedding and almost an implosion of Transnet. And now, you seem to be one of the biggest casualties. It reminds me a bit of that saying from Hemingway’s book about going bankrupt—gradually, then suddenly. In South Africa, it’s been gradual for quite a long time, somehow holding on. Now, suddenly, we’re seeing a very serious impact.

Kobus Verster: Good afternoon, Alec. Yes, I think what we indicated is that we’re finalising the process of winding down our long-steel products business, excluding the coke-making operations in Newcastle. This is a small part of the Newcastle operations. So basically, the central plant, large blast furnace, the 6-7 rolling facilities in Newcastle, the rolling facility in Vereeniging —all fed from the blast furnace in Newcastle—will be gradually shut down. It’s a significant event with many assets and people involved. From a financial perspective, it makes sense, but considering the social impact, it’s a very difficult decision we were forced to make.

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Alec Hogg: How significant is this in the overall scale of AMSA? I ask in the context of the announced reduction of three and a half thousand people, both contract workers and full-time employees. What’s the context of that?

Kobus Verster: In total, Arcelor Mittal in South Africa employs about 10,000 people directly and through various permanent contractors. So, three and a half thousand represents about 35% of the workforce. If you look at the volume numbers, it’s about the same percentage. That’s the extent of the reduction in footprint as well as personnel.

Alec Hogg: And in terms of production, for those unfamiliar with steelmaking operations, how crucial is long steel compared to other products?

Kobus Verster: There are two distinct focus areas. Our flat steel products, which will remain, produce high-quality products for automotive, roofing, appliances, renewable energy, and similar industries. It operates in a larger market with a relative balance between capacity and demand. Long products, on the other hand, largely serve large infrastructure development, including rebar. It includes a range of simple and low-quality products, constituting around 70% of the Newcastle range, and 30% high-value-added products for automotive and mining. This is a highly competitive market, especially in the lower-grade, commoditised items, where competitors have a preferential input cost due to substantial scrap discounts in South Africa. It’s challenging to cover losses in the lower-grade areas, especially when 70% of your production is in this highly competitive market.

Alec Hogg: I think it’s worth pausing for a moment to explain the competitor. If I understand correctly, it’s scrap metal processed through arc furnaces. You bring it to high heat, melt the metal, refine it into steel, and compete directly with a manufacturer like yourself, who brings in iron ore and converts it into steel. It’s almost like secondhand steel, becoming new again as opposed to the creation of steel. Is that correct?

Kobus Verster: Yes, I missed you for a moment, but you got it right. Electric arc furnaces or induction furnaces use scrap to produce steel. Certain types of steel don’t need virgin iron ore processes for quality reasons. Looking at the million tonnes for long products, when we close the long products business, it cannot be immediately substituted domestically. We have to work with our customers to phase out ourselves and provide them with import options.

Alec Hogg: The share price of Arcelor Mittal South Africa has taken a severe hit in the past year, dropping from R4.50 to an even lower R1.18 today. After losing five hundred million in the six months ending June, it seems you’re working to make the business sustainable. Achieving that might offer investors more hope.

Kobus Verster: In the last seven years, Newcastle only made a profit on an EBITDA level twice, burning around five billion in cash. We’ve been at this reflection point twice before, hoping for a turnaround. However, despite cost-saving initiatives and downsizing, it’s not enough to overcome the impediments. We’ve also somewhat neglected flat products. If one part of your business generates strong cash flows while the other is negative, you’re not investing as required. You do what you can, but you’re not on the technology curve where you should be.

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Alec Hogg: What will remain at the Newcastle plant after the long steel products are removed?

Kobus Verster: It will mainly be coke making. Currently, we produce coke in Vanderbijlpark and Newcastle, but not enough for our own consumption. We import coke and either sell it in the domestic market or supply Vanderbijlpark. On a standalone basis, the coke business would be substantially profitable, but it’s been eating into making steel and selling it at a loss, which seems illogical.

Alec Hogg: Kobus, we’ve had this conversation before. Is the massive Newcastle plant now going to be mothballed?

Kobus Verster: No, it’s a massive operation. I was there yesterday to deliver the news in person. It’s in good shape, and we spent almost half a billion last year revamping the blast furnace, positioning it to operate until 2034. Care and maintenance is a better description. Safely bring down the assets, and if fortunes change, restart it. Importantly, avoid vandalism. We have experience in Saldanha, and it’s in good shape there.

Alec Hogg: How many of those employed at Newcastle will still have jobs?

Kobus Verster: The three and a half thousand is a real number. We’ll do everything possible to accommodate and retain skills. With a population of 10,000, even if we increase volumes in Vanderbijlpark, it won’t require more people. It’ll be difficult, but we’ll explore options to find other opportunities or transfers for some. We’ll do what we can to lessen the impact.

Alec Hogg: Let’s discuss the why, something the whole of South Africa can hopefully learn from, especially with an election in six months. When people vote, they need to consider this. Load-shedding is back to level six, making business operations challenging.

Kobus Verster: The issue began at the macro level with around 0.9% economic growth, requiring stable steel consumption. Today, we’re at 2000 consumption levels after the 2010 boom and added capacity. Operating Newcastle on a million tonnes instead of 1.8 million impacts costs. Eskom and load-shedding create difficulties, and Transnet’s high tariffs add to the challenge. In October, we stopped the blast furnace in Newcastle due to ore shortage, costing around 50 million to restart. Additional road transport costs due to rail issues make the situation worse. The ban on exporting scrap compounds the challenges. Despite optimism in 2019, we’re less hopeful now for infrastructure spending and issue resolution. Allowing one part of the business to risk the sustainability of the entire company isn’t viable.

Alec Hogg: The concept of gradually and suddenly seems to reflect that you hung on as long as possible. But what about the rest of the business now? Transnet and Eskom challenges persist. How does this set you up for the future? Might we be having a similar conversation down the line?

Kobus Verster: I doubt it. From an energy perspective, we’re working on a 200-megawatt PV plant on-site, reducing flat business consumption by 43%. Exploring power purchase agreements (PPAs) and internal generation with a better gas balance suggests electricity challenges may last another three years, but we can manage the disruptions. Transnet management may improve if private access to rail infrastructure is allowed, bringing substantial savings. Legislation change is needed, but we’re ready. Optimism and adequate cash flow for asset and technology investments can make this an attractive business. After exiting long products, we’ll still be a 30 million rand business, and adding a million tons from current assets becomes feasible. Fixing the cost base allows for profitable exports.

Alec Hogg: Closing off, you mentioned your 200-megawatt plant saving 43% on electricity. Is that correct?

Kobus Verster: Yes, 100% correct.

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Alec Hogg: This could be a template for others, making you competitive again once freed from Eskom’s grip.

Kobus Verster: Absolutely. The gas collection, cleaning, and generation opportunities will further reduce costs. These green initiatives, like PV and gas, are cost-beneficial in the initial six years of our decarbonisation roadmap. Though the operation carries a tag of about three billion rand, our group is comfortable supporting it from a green investment perspective, something they push very hard.

Closure of steel production capacity at ArcelorMittal will have devastating implications for South Africa and the continent

Johannesburg, 29 November 2023. The announcement by ArcelorMittal South Africa on the closure of its operations in Newcastle and Vereeniging, as well as ArcelorMittal Rail and Structural will have a devastating impact on a number of fronts. These include the 3500 employees likely to be affected, the surrounding communities, suppliers, contractors and the broader metals and engineering sector.

Downstream industries are heavily reliant on the long-products that come from these plants to which a switch-over will not happen overnight. Even where these products can be imported this will result in the exporting of jobs that are desperately needed in South Africa. Moreover, the logistics challenges facing the country raise serious questions whether port and rail infrastructure can get product to the end manufactures.

A slow economy and difficult trading environment, high transport, logistics and energy costs, exacerbated by logistic failures and their resultant cost implications, the introduction of a preferential pricing system for scrap, a 20% export duty and more recently a ban on scrap exports have all played a major role in contributing to the current state of affairs. Compounding this is the DTIC’s blinkered and narrow focus on how best to create an enabling environment conducive to growth, stability and job security.  SEIFSA has repeatedly warned that the decisions relating to the scrap metal policy and its industrial policy consequences will yield casualties. What we are seeing unfolding at ArcelorMittal feeds directly into these warnings.

SEIFSA’s acting for and on behalf of its broader membership, which make up by far the most representative voice of both the upstream and downstream value chains in the metals and engineering industry, is firmly of the view that these and related industrial policy matters be urgently escalated to the Economic Cluster of Ministries, as it seems that the DTIC seemingly does not have the capacity, nor the grasp of the broader implications of these developments.

The matter is now beyond urgent and we urge the President and key Ministers in the Economic Cluster to treat it as such, if we are to avoid a socio-economic catastrophe of gigantic proportions in the metals and engineering industry which will reverberate throughout the economy and the continent, impacting the auto, motor, construction and mining sub-sector of the economy and all who work in it.

The reconstruction and recovery of the South African economy and more specifically the metals and engineering industry must be looked at in the wider context of reindustrialising critical sectors, along with all the other challenges facing the economy from energy and logistics to the water infrastructure and crime. 

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