According to Mineweb Arcelor Mittal explains terms of agreement with government to save steel sector.
Governments’ negotiations with Arcelor Mittal South Africa (Amsa) on how to rescue the steel industry stem from the common consensus that steel-making capability in South Africa is necessary to give the country a competitive edge in terms of manufacturing and driving economic growth. This was a theme at a an event about the company’s 2016 factor report on Wednesday, where Amsa chairman Mpho Makwana says that more products needed to be made in South Africa for the industry to have a fighting chance.
As an example, he mentioned the country’s often heralded automotive sector, which actually does not do much for local steel.
“If you look at Arcelor Mittal in the US, for instance,” says Makwana, “more than 30% of our steel is carried in the average car that is made there. In South Africa, a mere 6% of our steel goes into the cars that are assembled here. That has far-reaching implications in terms of jobs. You want that number to be as close to the 30% benchmark as possible.”
Makwana said Amsa could strive to become South Africa’s version of South Korea’s primary steel producer POSCO, whose steel, or a certain quota thereof, is mandatorily used in Samsung and LG products, as well as Hyundai and KIA automobiles.
“We don’t have that benefit in South Africa because we are not yet a brand-centric country in terms of brands that are manufactured in South Africa and symbolically carry South African steel so that you can drive a car with pride knowing it is made locally with local steel.”
He said that, while Cadac gas canisters and locally manufactured Defy fridges use local steel, more needs to be done in terms of developing local brands.
Give and take
Makwana said that last year top CEOs of big and small steel players including former Amsa CEO Paul O’ Flaherty, together with the secretary generals of the two major unions went and met government together and says, “We need you to save our sector. It is bleeding from foreign attack.”
But that rescue plan will involve a give-and-take between government and Amsa, where the former will assist in protecting the sector from cheap imports and legislating that certain products must contain local steel content, while Amsa has had to make concessions on various legacy issues, including the R1.5 billion fine
, while also putting a cap on future earnings and changing it’s pricing regime for local consumers.
Amsa general counsel and general manager of regulatory affairs Mohamed Adam outlined the terms of the renewed partnership with government.
“The principle is that we take some pain and we share some pain in the bad times, but we then give back in the good times. Conceptually, that is the essence of the agreement that we have reached with government,” says Adam.
Until recently, steel was excluded from minimum content thresholds for certain products in South Africa as part of the country’s transformation and developmental agenda, but it is now included in content ‘designations’ for certain products, like conveyance piping and power pylons. Amsa would like these designations extended to steel used in public sector construction projects.
“Government has asked what’s in it for them,” says Adam.
“Two things; Amsa said it accepts that, with all the assistance from government, it has to be as efficient as possible so that the price people pay for steel in the country is based on it being an efficient operator. The second is that, if we get out of the crisis and enter a boom steel market other counties around the world are making huge returns of 20% and above, Amsa must contribute even more to growing the economy.”
Amsa has thus agreed to a fair pricing model, which is a price calculated on a basket-price with an earnings cap, while as a part of its competition commission fine, has also committed to spending R4,64 billion in capital expenditure so as to improve its own efficiency. Government has also demanded that it move from an import-parity pricing model in steel producing countries.
Amsa chief financial officer Dean Subramanian said this essentially means Amsa would need to be as efficient a steel producer as Germany, which is regarded as one of the world’s most efficient.
Makwana also said the company was in the process of transforming its R29bn value chain, so as to empower disadvantaged persons. The three-year plan, which was put into action last year, will see Amsa insisting that its top 200 suppliers of raw materials, capital goods, logistics, and services are transformed. Since enacting the plan, the value chain’s BBBBE rating has gone from being at the lower-ranks of a level seven rating to a level three by the end of the year.