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More cost cutting as local steel demand still dim

VITAL INDUSTRY Steel plays a crucial beneficiation role for South Africa’s iron-ore

Photo by Bloomberg

NECESSARY IMPLEMENTATION The Department of Trade and Industry has decided to regulate the designation of locally produced and locally manufactured steel products and components for the construction sector

Photo by Duane Daws

28th July 2017

     

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To mitigate some of the negative impact of a worse-than-expected performance in the first quarter of the year, South Africa’s largest steel producer ArcelorMittal South Africa (AMSA) is implementing further cost cutting and efficiency measures.

This will also include a review of the long steel business in light of the price of scrap in relation to the raw material basket, which includes iron-ore, says AMSA CEO Wim de Klerk in an operational update on the company’s first quarter ended March 31, 2017.

In May, the Competition Commission recommended the Competition Tribunal approve AMSA’s proposed acquisition of the Thabazimbi mine, in Limpopo, which is in line with its strategy to “manage our costs more efficiently in what is a particularly difficult time for the local steel industry”.

Iron-ore producer Kumba Iron Ore agreed in February to transfer the mine to AMSA.

De Klerk said at the time that this agreement allowed AMSA to take full management control of the processes and costs related to the rehabilitation liability at the Thabazimbi mine. “In addition, we will investigate the feasibility of different options to possibly restart operations at the mine to supplement the company’s sources of iron-ore and with the potential of job creation.”

The company notes in its first quarter review that local steel demand continues to be subdued, despite the implementation of import duties on certain steel products and the designation of South African steel for use in State infrastructure projects by the Department of Trade and Industry (DTI).

In January, AMSA welcomed the decision by the DTI to regulate the designation of locally produced and locally manufactured steel products and components for use in the construction sector.

“The key building and construction sector typically accounts for one-third of all steel consumption and the designation of local steel content for State infrastructural projects at 100% minimum threshold will assist in diverting import orders back to local manufacturers and producers and strengthening the South African steel sector,” highlighted De Klerk in a statement earlier this year.

In its recent instruction note, the Treasury stipulated that, when State procurement bids are considered, such bids must be advertised with the specific bidding condition that only locally produced goods, services or works or locally manufactured goods, with a stipulated minimum threshold for local production and content, will be considered. Several categories of steel products and components have been listed that must have a minimum local content threshold of 100% when participating in State tenders.

“This is great news for the downstream industry. At AMSA, we have always believed this was vital to the resuscitation of the entire industry. This is why we dedicated resources to negotiate for the regulation of designation of local steel. The decision by the DTI is a clear indication that government has taken cognisance of the challenges facing the local steel industry and is committed to the sustainability of the industry,” says De Klerk.

However, AMSA’s local sales for the quarter were 30 000 t (3.4%) lower, mainly owing to weaker local demand for long products as a result of high stock levels at the merchants and strong competition in the local market. Long product sales decreased by 27.7%, while flat product sales increased by 10.7%.

“Although having declined slightly from 2016 levels (257 000 t in the first quarter of 2017, compared with 310 000 t in the comparable 2016 quarter), imports are still high, despite the 10% duties having been imposed,” explains De Klerk.

Liquid steel production was 28 000 t (2.3%) lower, mainly due to lower production at Vanderbijlpark Works, in Gauteng, as a result of poor raw material quality, and the rupture of the stove at blast furnace C during the fourth quarter of 2016. This has been partly offset by higher production at Saldanha Works, in the Western Cape. KwaZulu-Natal-based Newcastle Works’ production was lower, mainly owing to import coke and iron-ore quality. The capacity use during the quarter under review was 80%, slightly down on the 81% of the comparable year-ago period.

Export sales increased by 20 000 t (8.8%) of which flat products were slightly higher at 2 000 t and long steel products at 18 000 t. The strong international demand was negatively impacted on by the strengthening of the average rand:dollar exchange rate for most of the quarter.

Commercial coke sales were 38 000 t (44.2%) lower. The company is currently undertaking a repair programme on two of its coke batteries, which has had the effect of limiting the amount of coke available for blast furnace production and for sale to the commercial coke industry. During the repair of the coke batteries, the company is importing metallurgical coke to supplement shortfalls.

“Overall, performance was below what was expected, owing mainly to the strong rand against the dollar for most of the first quarter, as well as the higher raw materials basket as a result of increased coal prices, ongoing imports and the impact of 2016 operational incidents,” said De Klerk in January.

Looking ahead, he states that local sales will continue to be under pressure in the second quarter of 2017, owing to tough trading conditions, which is mainly the result of lower steel demand because of poor economic activity and ongoing imports. Export sales will also come under pressure as a result of weak international prices. The volatility in the rand:dollar exchange rate will continue to have an impact on the company’s financial results.

Steel Regulations

The International Trade Administration Commission of South Africa has notified the World Trade Organisation of its decision to implement safeguards on hot-rolled coil as of July, although there are certain processes to be completed before this is confirmed with all stakeholders. This will provide a benefit in terms of sales volumes and the ability to consistently achieve the basket price.

“We fully support the protection of the downstream industry from cheap imports of finished and semi-finished products that continue to be imported into the country and we will continue to engage with government and the downstream industry on the implementation of safeguards and initiatives to stimulate local demand,” says De Klerk.

AMSA notes that it has been working closely with various government departments on protection measures that will ensure the survival of the local steel sector in the face of weak global demand, excess production and an influx of cheap imports into the local market. This is in line with almost all steel producing countries who have imposed protection measures, including import duties, safeguards and antidumping measures to ensure the survival of their respective steel sectors.

The tough conditions in the global and local steel industries have had a significant impact with the demise of several large steel producers, including Evraz Highveld Steel & Vanadium, South Africa’s second-largest steel producer, which is now in business rescue. Despite this, steelmaking remains a key strategic industry for South Africa, representing 1.5% of the country’s gross domestic product and accounting for about 190 000 jobs. Steel also plays a crucial beneficiation role for the country’s iron-ore, adding billions in value to its raw materials base. It also underpins several other key industries such as agriculture, construction, mining and automotive, explains AMSA.

“[The designation of local steel] is an important step in realising our quest to preserve South Africa’s primary steel industry which is a key contributor to the country’s economic development and underpins the implementation of its National Development Plan.

“The designation also comes at an opportune time as we have recently [December 2016] signed an agreement with Evraz Highveld Steel & Vanadium, where AMSA will supply blooms and slabs for processing into heavy structural steel, which is used largely in the construction sector,” De Klerk emphasised in January.

This agreement, subject to certain conditions precedent, was expected to result in the reopening of Evraz Highveld Steel’s heavy section mill, creating jobs and strengthening the industry as locally produced heavy structural products will once again be available to the South African market.

AMSA and Highveld Structural Mill, as a subsidiary of Evraz Highveld Steel & Vanadium, officially restarted the heavy section steel mill in eMalahleni for production in April.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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