Hello and welcome to the So What podcast in which political economic analyst JP Landman
discusses the issues uppermost in the minds of South Africans. You can find a written
version of this content on JP's website jplantman.co.za. I am Ruda Landman and I am your host.
This podcast, dated the 27th of January 2025, is titled AMSA, the sound and fury of a partial
closure. We came back from a delightful holiday in Namibia and walked into a storm. What was
it about? Was it just about steel factories closing?
Ostensibly, yes. It was about the announcement by Arcelor Mittal, South Africa, which we will
refer to as AMSA, closing their long steel business. But in reality, Ruda, it's about
much more. It's about import tariffs, it's about protection of local industry, it's about
localisation, it's about industrial policy. All these things came together in this AMSA
issue and it's what we do in this note in January. We unpack all these issues a bit.
Tell me about the origin and the history of AMSA, Arcelor Mittal, South Africa.
AMSA started its life as YSKOR, the South African Iron and Steel Corporation, which
was founded by Hendrik van der Bijl, the man who single-handedly industrialised South Africa
way back in the 1920s. It became a big steel business in South Africa and it played a huge
role in producing the steel and many steel products that you need in the modern economy.
What I think is important to remember is that the old ISKOR consisted of two businesses,
steelmaking, but they also had a mining side. On the mining side, they had iron ore and
coal mines. The benefit of having iron ore mines is that you can buy or acquire the iron
ore that you need for steelmaking cheaply. You have your own mines, you can make arrangements.
That's the way in which the old YSKOR operated.
Then, how did it become Arcelor Mittal?
Yes, in 1989, ISKOR was privatised and listed on the JoBurg Stock Exchange. In 2001, 12
years later, it was split into two separate companies. The one is YSKOR Steelmaking and
the other one, Kumba Resources. They took the iron ore and coal mines. In 2004, Lakshmi
Metal that we will talk about bought the company and they changed the name from ISKOR to Mittal,
called Steel. In 2006, I think the problem started because then Kumba Resources itself
was split into two companies, Kumba Iron Ore, which still exists today and is a very profitable
miner of iron ore, and Exxaro. Exxaro Resources, as you know, is a mining and coal company
also listed on the JSE. That's the history. This split up of Kumba between coal and iron
ore had the effect that in 2010, Kumba Iron Ore cancelled the arrangement that they had
with the old YSKOR or Mittal Steel to provide iron ore for the steelmaking on preferential
terms. They wanted a much more market related agreement. There were court cases, negotiations
and political interventions and so on. But in 2013, Kumba Iron Ore and Mittal Steel made
an agreement where they still bought the iron ore from Kumba, but at much less preferential
terms. That must have hit AMSA's or YSKOR's balance sheet considerably.
Another thing that comes up in this whole conversation is the difference between long
steel and flat steel. Explain that? Yes, as the names indicate, long steel is
anything that is long. Bars that you use in reinforced concrete, for example, railway
tracks, it's long steel. Anything like that goes through as long steel. Flat steel is
basically sheets which are made, whether you use the sheet to fold it and use it for car
manufacturing or whether you use the sheet to fold it into corrugated iron that you can
put on a roof. It's basically long versus flat. Now, what AMSA is doing, they're closing
their long steel business, but it's important to note that they're not closing their flat
steel business. That will continue. What part of the business is the long steel?
They don't disclose the numbers, but the general understanding in the market is that long steel
is more than 50% of AMSA's business. It is a big part of the company.
What is the global context? What's happening in other places across the world?
What happened in the first half of the 20th century is that many, many countries in the
world had the belief that just as you had to have a national airline to be a serious
country, you had to have steelworks and you had to have your own steel company. Therefore,
a lot of governments in the world created steel companies like the government here created
e-score in the 1920s. Exactly the same story. Now, the problem is if everybody is building
a steel factory, then there's huge overcapacity in the world. Many of these steel companies,
particularly the government owned ones ran into financial difficulties. And there's
an Indian entrepreneur, Mr. Mittal, who saw the opportunity. He started buying up the
steel companies worldwide. And of course, he rationalized them, reduced the staff numbers,
sweated the assets and he himself became fabulously wealthy. And in the process, he
drove the consolidation of steel capacity worldwide. And this process has been ongoing.
Mr. Mittal's rationalization drive was not the only one. For example, British Steel,
which for a long, long time was the biggest steel company in the world, had massive rationalizations
and buying up other companies and merging and so on. And in the end, they themselves
merged with the Dutch steel company Koeninklijke Hoogovens and became Corus Steel. Corus
Steel in turn was taken over by another Indian company, Tata. And what Tata did was to close
down a huge amount of capacity. And today the UK, which once had British Steel and was
a very, very big steel producer, today the UK produces about 25% of what they produced
in the previous century. So a lot of capacity has been closed down worldwide. And this Lakshay
Mittal initiative and the Corus Tata initiative is not the last. We've seen very recently
Japan Steel, Nippon, once wanted to buy US Steel and it's a transaction that was vetoed
by President Biden when he was still in office. And it all plays into this thing of overcapacity
in the world, trying to protect jobs, trying to protect all industries. And it's an ongoing
process. Was the closure of the, at least the long steel part of ArcelorMittal unexpected?
But for people who were in the industry, we have a friend who used to be in steel construction
his entire life, a civil engineer. After he retired from steel construction projects,
he became a professor at the engineering faculty at Stellenbosch University. And about eight
years ago, a long time ago, he guided one of his master's students to do a thesis on
can you develop long steel products, particularly steel bars from welded steel? In other words,
can you use flat steel products to produce a product which is normally made in long steel?
And this was eight years ago. And I asked him, so what prompted you to guide the student?
And he said, look, it was already clear 10 years ago that long steel is in trouble because
there's this huge overcapacity worldwide. If you can import long steel from Indonesia,
I'm just mentioning a name, or you can import it from India, why on earth would you make
it in Vereneeneging? And he saw this coming. So for people in the industry, it wasn't quite
a surprise.
Then there's a whole raft of other players in the field called mini mills. What are they
and what do they do?
Steel is made from iron ore in a furnace and you get your products out in the other side,
long steel or flat steel. But what you can also do is you can use scrap metal and you
can use electricity at very high temperatures to melt it. So you put the scrap metal in
on one side and the other side you've got steel products coming out.
Recycling.
Recycling basically. Now we haven't had mini mills in South Africa. It's a phenomenon
of the last 10, 17 years to be precise. And how it works is like this. If you're a scrap
metal merchant and you buy scrap metal from wherever in the public office it to you, you're
not allowed to sell that or to export it. You first have to offer it to a mini mill
in South Africa. And the price that you have to offer it is the international price of
scrap in Rotterdam minus 30%. So in that way, the scrap dealers of course take a cut. They
suffer a little bit. They can't now export at market prices. But the mini mills get it
at Rotterdam minus 30%. So their input cost is much lower. And therefore a whole flourishing
mini mill industry started to develop in South Africa. As I said, 17 years ago there was
nothing. And today this policy of benefiting or helping mini mills has resulted in 50%
more or less of long steel products in this country being made by mini mills. In the past
20 years ago, 25 years ago, AMSA made the whole lot. Now their market share is down
to probably less than 50% because there's also still imports. So the rise of the mini
mills on the back of aggressive government policy has also changed the landscape quite
considerably. Now these two elements of the mini mill policy, i.e. scrap metal must be
offered at 30% discount and you cannot export it. The export ban and the price regulation
go together. The question is, if you take those two things away, will the mini mill
industry survive? And we just don't know. The current arrangement is scheduled to end
in 2027. I think it's June 2027. But of course it can be renewed. Now Arsalan Mattal and
many other players in the country are pushing very strongly that it shouldn't be renewed,
that in 2027 this subsidy effectively for the mini mills should fall away. We will see
what happens in two years time and we will have to see how many of the mini mills can
survive. But I must just make one point quite clear. A lot of people think that the mini
mills are just a sort of inferior operation. And that's not the case at all. Score metals,
which in fact is more or less the same age as Arcelor Mittal or YSKOR, fall more or less
at the same time. They are also now a big mini mill producer and they export high quality
steel products all over the world, including to China. Now there can't be too many companies
that export steel products to China. So it shows you it is possible to be a mini mill
and run a highly sophisticated operation. That is quite possible.
Does Arcelor Mittal itself play in this field? No, not at all. They never invested in the
technology. Mini mills operates on entirely different machinery, entirely different technology.
And no, they never invested money. And in fact, if you go through all the reports and
so on, there's a lot of criticism of AMSA that they made the wrong capital allocation
decisions over the years. People say they could have spent their money better and they
would be a much more productive and a better steel producer today. Now I'm not wading
into that argument. I'm just noting that those accusations are there, that they haven't
spent their money in the most optimal way. What does the steel market in South Africa
look like? How much do we use? What do we produce here? Do we import?
Yeah, that's very interesting. We've got capacity between Arsalan Mattal and all the
mini mills to produce 8.8 million tonnes of steel a year. Last year we only produced 4.1
million tonnes, less than half. And of those 4.1 million tonnes, we imported 32% or about
1.3 million tonnes. So that gives you the story. Now the steel people, AMSA in particular,
argues that if the economy is growing at a higher rate, then there will be more demand
for steel and things will be better. Well, that's of course true because steel demand
is very sensitive to economic growth. 3% is much, much better than 1%. And as you know,
we've been growing at 1%. That will change once you've got 3%. But does that mean that
our full capacity will be utilised? Not necessarily, because as I've said, even under these depressed
conditions, we import 32% of our steel. So if there's a bigger demand for more steel,
you may find that your imports also go up. Why do we import if we have the local capacity?
It's all about price and quality. So, you know, steel is not just steel. And steel products
are not, all of them are not made the same. I'll give you two examples. In the old, in
previous times, in the old South Africa, when we still built railway lines, we imported
30 to 40,000 tonnes of railway tracks a year, because the old Iskor then couldn't produce
them locally. Today we've got a very flourishing motorcar industry. We import about 300,000
tonnes a year for steel that go into the assembly of motorcars. So either the prices locally
cannot compete with foreigners or the quality is not there. So that's why you, that's why
you have imports. And that will probably carry on even if there's a higher demand for steel.
Could tariffs make a difference with President Trump at the moment, saying, seeming to think
that tariffs are the answer, whatever the question? Look, at the moment there is an
import tariff on imported steel of about 9%. AMSA says it's not enough. They want 25%.
And that takes you to the heart of the matter. Do you force consumers to pay more for a product
in order to protect the local industry or do you subject the local industry to competition?
And there's no clear answer on it. There's no right or wrong. It's a public policy choice
that you make. AMSA likes to point out that there are countries like Mexico, for example,
where there's 82% import tariff on steel. We've seen that President Joe Biden refused to take
over by nipping off US steel. So it plays into jobs, into politics, into protection, localization,
that sort of story. In the end, I don't think tariffs will make much of a difference. That's
the experience worldwide. In the end, you have to have the best product at the best price. And to
get to the best product at the best price, you need investment. You need the latest technology.
You need the latest machinery. You need best practice. If you don't apply that,
then you're not going to make it irrespective of what the...
And I suppose you need scale. And you need scale. Absolutely,
there's a very important point. You need scale. And if your local economy is not big enough,
well, then you must be good enough to export. And that brings you back to best practice,
best product, and so on. Yeah, so scale is absolutely important. If we look at the world today,
in many industries, for example, electric cars, the Chinese are just way, way ahead. What do they
have? They have the latest technology, better than anybody else, including Tesla. And they have scale.
And that enables them to produce cars to the extent that build your dreams. The EV manufacturer
in China is outselling, has begun to outsell Tesla. That's what happens when you've got the
technology and you've got the skills and you've got the scale. We also see it here in the poultry
industry. Absolutely. Steel and chicken bring to the fore the same issues. We pay import levy on
imported chicken. Chicken is the country's biggest source of protein. So now your consumers pay more
for their protein than what they would have if they were no tariffs. On the other hand, you're
protecting the local industry. And there's your choice. What do you want? Consumers pay more
or subsidize the local industry? And again, there's no right or wrong. Make your choice.
It's a public policy choice that you have to make. Shifting our focus back to steel,
what's going to happen? What are the possible scenarios? Well, the interesting thing is for
the short term, it's important to note that at the end of November last year,
the revenue service imposed import tariffs on what is called structural steel products
from China and Thailand. In the case of China, the levies are 52%. In the case of Thailand, 9%. So
those are clearly two countries which export products to us very competitively. That's why
they put it in. But that's a temporary measure for six months only while ITAC,
ITAC is the International Trade Commission, investigate allegations of dumping and they
will make recommendations. And then we will see which way it goes. So that's the one thing.
The other thing to bear in mind, that's happening, the Chinese have built the ultra-modern steel
plant in Zimbabwe. And they came into operation last year and those products have already started
arriving in South Africa. So we can see steel imports from ZIM taking place here. A third
development that's taking place, different Chinese companies are looking at building
a steel factory in Limpopo. But there's huge, huge environmental resistance to it. So something that
I was just wondering about is what are the possibilities that those steel companies are
convinced instead of building in Limpopo, rather take over the plants that I'm so closing?
Refurbish them, make them modern, put in new equipment and run with that existing infrastructure
in terms of roads, railways, water and so on, rather than stuffing up the Limpopo province.
But I don't know what will happen. We'll have to see how these things play out.
Is that just a twinkle in your eye or do you know that something is happening?
No, it's just a twinkle in my eye. I know that the Chinese are trying to build a steel factory
in Limpopo and I know there's huge opposition. We'll have to see how that plays out.
But it sounds as you've said that this is fundamentally about industrial policy and
not just South Africa. It's a point of principle everywhere.
Yes, it is. Now there's a very interesting Japanese economist, Richard Koo, who wrote
some very interesting books on what he called persecuted economies. And what is a persecuted
economy? It's an economy that had a golden era of manufacturing and industrialization.
And then the golden era passed because new economies came up that were more efficient,
more better technology, later equipment and so on and so forth. And they started persecuting
the old economy. So the old economies, in a way he tells it, is the US, the UK, Europe,
even to some extent Japan. Who are the new economies? Taiwan, South Korea, China and as
we've seen Thailand. So they become to eat away. The hunters of yesterday have become
the hunted of today and they're new hunters persecuting the old hunters. This is a fundamental
development that's taking place worldwide. And it's happening in a large number of industries.
For example, the German car industry, I think is in huge trouble as a result of competition from
Chinese car companies who've built an enormous car sector. So the question is how do you position
yourself in the light of that? And my own feeling is that it's no good trying to maintain that
which comes from yesterday. Yesterday's industries cannot be sustained. There could be a transition
period. There could be a time that you allow for adjustment, but in the end you cannot protect the
old industries. You've got to develop new industries through innovation, new discoveries and so on.
And that's where I think we have to focus. The persecuted economies had their golden era. It's
over. They must now look at chips or satellites or you know what other industries there are in
which they can excel. They can't excel any longer in the old industries. So coming to So What? How
serious is this in the picture? The closing down of the Arcelor Mittal long steel business?
Not as serious as the media for all rate suggested. First of all, Kobus Verster, the
chief executive of AMSA, he himself has said that once they've closed down the long steel business,
they can actually have a very flourishing flat steel business. So that's there. We know that on
the long steel side, 50% of the product currently in the country is being supplied by minimal. So
it's there. Thirdly, we know that there are strong imports and that we can import more from whatever
we need from overseas countries. So I don't buy the narrative at all that the entire steel industry
will now collapse. And with that, the further argument that manufacturing will collapse.
I mean, for example, the automobile components industry, they lamenting and shouting and screaming
and so on. But they also said the closure of Newcastle, if it can be postponed for 12 months,
then minimals can be certified by the auto manufacturers for having the quality
and the standard needed for the motor car industry. So that's a period of transition.
You upgrade yourself if you're a minimal, put in whatever the auto
makers want and lifeguard is on. Now, I think it's part and parcel of life where old industries die
out and you adjust to new ones. Think of gold mining. There was a time when South Africa was the
biggest gold producer in the world. Today, we don't really feature. Why? Well, because all the gold's
been taken out. Industries arise, industries die. The question is, how do you adapt?
And for you, you don't normally really put forward your opinion. You don't really
put forward your opinion, but you do this time. What is for you the so what when it comes to public
policy? No, I think we should focus on those. We should have an industrial policy. That's number
one, not one based on subsidies and protection, but one based on developing new industries where
we've got a competitive advantage. Now, I mentioned, for example, green energy. We are abundantly
blessed with solar and wind resources. We can use that to build a green energy industry. We can
build hydrogen, for example, tourism. We are abundantly blessed with tourism assets. With that
comes conservation. So those are areas where we've got a competitive advantage. Then there are areas
where the capabilities of the nation enable us to compete. For example, hospitality and personal
services. Think of hospitals. People will tell you that the treatment they get in hospitals here are
better than what they get in many European countries. So focus on that. Enable that kind
of industry to grow and to expand and employ more people. Then there's arts and culture. I don't
have to tell you about the success of something like Jerusalem and other South African artists.
So instead of thinking just in terms of smokestack factories, think of these new industries that we
have, which we can expand. Lastly, take agriculture. We've got a highly, highly successful
agricultural industry. So if you're successful in agriculture, think of what is just next to it.
Agro-processing. What can we agro-process where we have the competitive advantage that we can
compete in the world? So that, I think, is the approach one must take. Is not to defend the old,
but to develop the new and from there get economic development. Thank you for listening to the So What
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Remember, you can find a written version of all JP's content at jplandman.co.za.