ArcelorMittal South Africa (Amsa), the largest steel producer on the African continent, has backtracked on the anticipated closure of its Newcastle Works for “social” reasons but will be cutting further jobs at its these operations and throughout the company.
Amsa CEO Kobus Verster said on Thursday that a Section 189 notice was issued to workers at Newcastle on January 31 and could affect about 400 people.
However, Verster said the closure of significant long steel product plants is not anticipated in the foreseeable future subject to the achievement of targeted cost savings in those businesses.
Verster confirmed that job losses totalled about 2 400 in the past year.
This included 700 people who received packages and the 450 people affected by the decision to close the Saldanha Steel Works.
Commenting on the estimated impact on sub-contractors, Verster said about 800 people will be affected in the first phase, with about 450 people at Saldanha.
But he stressed that the company has to address the cost base at Newcastle and elsewhere within the company further.
“I don’t have numbers for what more is coming but we have to do more,” he said.
“When we looked at the closure of Newcastle or the closure of Newcastle upstream, we came to the conclusion that the impact of that is substantial on the domestic market of Newcastle.
“Financially, you could say shutting it down is better. We did take a decision not to proceed and we are taking a bit of a social decision.
“But there is still a cost problem, and in terms of our analysis we have identified where we can do more, and that is what we want to implement,” he said.
Sombre set of results
Amsa on Thursday reported a R632 million loss in earnings before interest, taxes, depreciation, and amortisation (Ebitda) in the year to December compared to a profit of R3.6 billion in 2018.
Verster said once-off and impairment charges of R2.3 billion were booked, mainly on severance packages for Section 189 employees as well of the costs of the closure of Saldanha, the impairment of fixed assets at Newcastle, and the closure of the tinplate operations at Vanderbijlpark.
Headline earnings decreased to a loss of R3.27 billion from a profit of R968 million, translating into a headline loss a share of 299c compared to an 89c profit in the previous year.
Group revenue declined by 9% to R41.4 billion, attributed largely to the 8% reduction in sales volumes.
Amsa’s total sales volumes fell by 8% to 4.1 million tons mainly because of an 11% reduction in domestic sales.
Verster said the 2019 financial year represented the most challenging year for the world steel industry since the global financial crisis and an exceptionally difficult year for the South African economy, and therefore also for Amsa.
Average international steel prices fell by 15% in the year while Amsa’s overall realised steel price in US dollars fell by 9%.
“The downturn in the world steel industry has been faster and deeper than could have ever been anticipated,” he said.
The company’s raw material baskets – including iron ore, coking coal and scrap – represented 51% of costs and increased by 12% in rand terms, driven by sharp increases in iron ore prices.
Verster said increases in electricity as well as port and rail tariffs continued to have a detrimental impact on the company’s international competitiveness, with these unaffordable increases off an already inflated base resulting in additional costs of R439 million compared to the previous year.
He said the impact of load shedding on assets and sales is substantial and is disruptive.
However, Verster said the problem is not necessarily load shedding but the cost of electricity that has become unaffordable.
Verster said Amsa’s application to Eskom for a reduction in electricity tariffs was unsuccessful but the company continues to engage with the utility.
He said Amsa spends R3.1 billion a year on electricity and R3.4 billion at Transnet, adding that the percentage overcharge “whether it’s 30% or 40%” based on global and local benchmarks is “big numbers”.
Verster said Amsa four months ago kicked off a project to see what opportunities there are to produce its own electricity through solar and gas initiatives.
“Obviously it is prioritised from an affordability and a return [on investment] perspective. We will be in a position internally soon to make a decision around that,” he said.
Verster added that the group already generates about 8% of its total electricity consumption in the group.
Its Business Transformation Programme initiatives yielded Ebitda improvements of R1.45 billion during the year, or R2.1 billion ($36 per ton) cumulatively since launching in August 2018.
The programme is targeting at least a $50 per ton improvement to address the controllable elements of the cost gap between the company’s production costs relative to that of subsidised China-sourced steel.
The National Employers Association of South Africa (Neasa) has been consistently critical of the protectionist duties on steel imports.
Government has a choice
Neasa CEO Gerhard Papenfus said late last year that government will have to choose between the protection of an unprofitable, struggling Amsa that employs 9 000 people, or breaking the stranglehold that these duties have on the steel downstream sector, which employs more than 500 000 people.
Looking ahead, Verster said that internationally margins have been tightly squeezed although elements of normalisation are becoming evident.
He expects that low domestic growth will require continued intervention and said Amsa will this year continue to focus on its business transformation initiatives as well as the implementation of its ‘one organisation’ approach and key strategic cost reduction initiatives.
“Engagements with stakeholders regarding unaffordable regulated tariffs and developmentally priced raw materials will also continue,” he added.
“Through these targeted and strategic measures we will be better prepared for any upturn in the market.”
Shares in Amsa dropped 4% on Thursday to close at R1.20.