Priority number one for Kobus Verster, CEO of steelmaker ArcelorMittal South Africa (Amsa), is to revive employee morale.
“This is a business that’s been in distress for the last ten years,” he said in an interview shortly after the firm’s interim results. “We need to ignite the culture of the organisation,” he said.
That’s easier said than done. The numbers of the last few reporting seasons demonstrate in a microcosm how difficult a business steelmaking in South Africa has become. In 2017, Amsa posted a headline loss of R2.5bn which was followed by a ‘windfall’ profit last year of R968m. Before that, accumulated headline losses of R8bn had been registered during financial years 2014 to 2016.
Also threatening employee morale, is the fact that retrenchment lies in wait over the livelihoods of roughly 2 000 employees – about 17% of Amsa’s workforce (and possibly more if trading conditions don’t improve). It’s a tough place to be: a fact Verster knows all too well, having called himself steelmaker for nigh on 20 years. He worked in various financial and treasury functions at the company when Amsa was Ispat Iscor and, before that, Iscor.
During that time, and mostly spectacularly through the 2000s, Amsa has been a business in shrinkage. Between 2000 and 2005, it parted with about 30 000 employees as the impact of its unbundling in 2001 hit home. In that transaction, Amsa was separated from the mining assets that went on to become the highly successful Kumba Iron Ore and Exxaro Resources.
Is it just a coincidence that these upstream mining businesses, once called ‘dirt diggers’ by ANC policymakers, have flourished while their downstream brethren, the steel manufacturers, have suffered so?
Verster found a lot in Tito Mboweni’s recently submitted economic reform paper to recommend, even though it up-ended the above position – which has also been the long-standing government position – in saying the end-game for SA’s iron ore and metallurgical coal industries was not to make a tonne of steel. It might be elsewhere in the world, but not in SA.
“I’m quite positive on Tito Mboweni’s paper, but things like that need the government to pull in the same direction,” says Verster. Failing to move in a concerted direction is one reason for SA’s currently broken-down economy. The blunt, fact-of-the-matter is that without economic revival and sustainable growth, there can be no Amsa, and no steel industry.
“The domestic steel industry, to be successful, needs a reasonable amount of domestic demand,” says Verster. Anything less than 1.8% GDP growth is not enough to sustain it. “At the moment, we’ve got a continuous downward spiral in steel consumption,” he says.
Quite apart from the overlay of economic decline, there are specific national factors that make life hard for Amsa, and other steelmakers. One is the relative sanguinity SA has towards cheap imports.
Tariffs are only applied to Taiwanese and Russian imports once they pass through a volume threshold, but it doesn’t take a lot of cheap steel to make a bad situation worse.
Verster says the company is also lobbying for value chain tariff protection that shields from cheap imports the livelihood of the wheelbarrow manufacturer as well as the steelmaker from which it buys. “If you only protect the upstream, you’ll lose the downstream,” says Verster.
Then there’s Eskom.
Verster says the company has made endless petitions to the power utility for a special tariff. “We haven’t got much of a positive response. But we will continue when Eskom goes to Nersa [National Energy Regulator of SA],” he says, but adds that they’re “not that optimistic of a result”.
At least the second half of the financial year ought not to present the same perfect storm of the first. As Standard Bank Group Securities analyst Thabang Thlaku described it: “What could go wrong, did go wrong” for Amsa.
The rand was 16% weaker during the six-month period compared to the previous financial year, but that’s where the good news generally ended. Sales volumes were down 9% year-on-year, and steel prices were 19% lower. Logistics and other costs, such as the sky-high increase in the iron ore price, increased by R507m, but perhaps most damagingly, increased competition from imports equal to 20% of steel consumption. The weaker rand added R1.3bn to pre-tax earnings, but the damage was done on the cost side.
Clearly, Verster is not sitting on his hands. “I’m not going anywhere,” he says of the challenge at hand. Key among his response is a $50/t unit cost reduction drive by 2023, although analysts think that’s “a stretch target” given the paucity of infrastructure development that’s Amsa’s lifeblood. “Increased competition from imports is likely to undermine management’s efforts,” said Thlaku.
No matter, says Verster. “We’ve realised $15/t of those cost savings already and we’re confident we can help close the gap between ourselves and our competitors in the US and China,” he says. “We’ve got very good plants in terms of our technical standards.”
Amsa is also hoping to ‘trade out’ of some of its difficulties. It is investigating increasing its production of coke and chemicals where there’s a supply deficit (even though the country produces it). Longer term, the company is hoping to add ‘dirt-digging’ back to its portfolio of assets with trials underway to assess the quality of iron ore from Thabazimbi, the mine it bought from Kumba.
“We took Thabazimbi over last year and have the mine in rehabilitation at the moment. But there are 200m tonnes in above-ground material and there are two different opportunities that could see beneficiation,” he says. “We’ve mined some samples and sent them to R&D in Spain. Once we get the results, we might end up developing the mine for longer-term supply. It’s quite massive.”
Over and above internal company dynamics, and government policy, Amsa has to survive in a deeply competitive global industry. Verster pinpoints China as the most influential aspect in Amsa’s life. It produces 53% of all production and is a massive consumer. Recent stimulus efforts put a spring back into the Chinese economy but, if it falters, supply finds its way to SA’s borders.
Chinese companies are also state-supported, whereas Amsa is largely dependent on market forces and the support of its controlling shareholder, ArcelorMittal. Verster thinks, however, that China may cut production in the near future. Exports aren’t making sense for them currently and pressure to lift their carbon footprint is also raising the possibility of production cuts.
Globally, however, capital expenditure in steel production is estimated to increase by 19% or some $4.2bn to $26.7bn in 2020, compared to levels in 2018. That’s according to a report by Renaissance Capital, which also found that sector utilisation capacity – the ability of steelmakers to increase production without increasing costs – have widened.
It makes for sobering reading for the likes of Amsa. “The global steel industry could be in oversupply for the next two years and we believe this could weigh on steel prices,” it said.