By Harold Vermaak
Networth Investments’ offer to buyout a controlling stake in beleaguered ArcelorMittal South Africa (AMSA) from its parent ArcelorMittal Holding AG remains valid and it can make the group profitable rapidly, without job losses - stakeholders take note.
In November 2024, Networth, with the support of the government through the Department of Trade and Industry and Competition (the dtic) and the Industrial Development Corporation (IDC) backing, extended an enquiry and offer to buyout ArcelorMittal Holding AG’s 70% shareholding in AMSA at R4.7 billion and a commitment to invest around R16bn to fund upgrades and decarbonisation, with the aim of avoiding the now impending disastrous shutdown of Newcastle, Vereeniging and Highveld AMRAS Steel mills, which is poised to result in approximately 3 500 job losses, as announced by AMSA on 6 January 2025.
ArcelorMittal Holding AG’s response to Networth on the 28 November 2024 was that “while circumstances may change later, they are not contemplating the sale of the interest in AMSA”.
Both the dtic and the IDC have copies of this response.
Just a month after this refusal to sell the AMSA interest to Networth, AMSA shocked South Africa’s industrial landscape with its decision to close its Longs products business citing weak steel markets and high costs that related mainly to energy and logistics, and the likelihood of poor financial results amongst others, as reasons for the decision.
The state of the market has not changed since ArcelorMittal AG rejection of the offer. It is clear that the shutdown of the long steel business was in planning and contemplation by ArcelorMittal AG - as the shareholder controlling the management of AMSA - at the time that the offer from Networth was summarily rejected.
Networth’s strategy for the proposed buyout and turnaround of AMSA is two-fold; firstly, from within 8 months of 2025 up to 2028 “the transition period” the plan is to reduce the iron ore and coking coal delivered cost to Newcastle and lower energy by around 40% taking into account that these input costs have historically accounted for around 75% of Newcastle mill variable cash cost split.
To achieve this the plan is:
- Hold inventory on a 90 days basis to mitigate Transnet and logistics disruptions as opposed to what seems to be the “Just in Time” model used by AMSA currently.
- Operate Newcastle blast furnace at over 90% capacity against current operating capacity of 50%
- Return Newcastle to low cost production
- Export 75% of the competitively priced Newcastle steel production output to global markets through agency agreements with steel trading companies of international repute and significant distribution networks
- Convert AMSA’s 3 blast furnaces to highly efficient Electric Arc Furnaces; Commission sizeable renewable energy plants in all AMSA plants leveraging turnaround strategy strong balance sheet.
Networth’s team’s AI business model indicates that these urgent immediate as well as medium term actions will result in:
- The avoidance of retrenchments and job losses in all AMSA plants.
- There will be no need for the government to cancel the scrap benefit on the basis that such scrap benefit is giving mini-mills an advantage over AMSA. AMSA has an electric arc furnace with 400 thousand tons per year production capacity in Vereeniging Longs steel plant, and operates an induction furnace and other in Newcastle that enables it to benefit from scrap use and the Price Preference Mechanism as competing mini-mills do.
In the second post transition period – 2028 onwards - the plan is to diversify AMSA plant product range by adding in export oriented high value-add stainless and speciality steels and to grow AMSA turnover by around R60bn with sustainable EBIDTA margin of 21%, base case.
AMSA plants will be positioned to be among the first ’producers of quality low cost green steel products to support a climate friendly environment. Some 70% of AMSA’s quality green steels will be sold to a standing pipeline of international off-takers with strong balance sheets.
Production for own downstream beneficiation will be horizontally integrated to stimulate local and regional demand, grow the economy and contribute to sustainable mass job creation – by investing profits to create shareholder value.
In 2023, South Africa produced 4.9 million tons of steel products and AMSA accounted for 2.4 million tons with global crude steel production at around 1.8 billion tons and the exports of around 434 million tons, so it is incomprehensible that South Africa’s production of less than 5 million tons a year cannot find a market.
This unfortunate export record is due to AMSA’s parent company ArcelorMittal AG strategy of regionalising its subsidiaries’ sales. The South African steel market has been dominated by then Iscor and now AMSA for over 70 years largely due to significant state support in the form of subsidies mainly from Transnet and Eskom. In a modern, growing economy these subsidies are unsustainable.
The threatened closure by AMSA of what should be an extremely profitable and growing employer in South Africa impacts negatively on all infrastructural SOE’s. Eskom is in the unhappy state of being forced into expensive retail reticulation instead of profitable bulk supply because large plants are closing for reasons of political and global trading expedience that has nothing to do with its own competence – with the result that its poor financial position is being made even worse, and its ability to support extended operations or new operations are being progressively eroded.
Transnet is in the unhappy position of losing countless millions of ton-kilometres of bulk freight revenue - more than four billion ton-kilometres in the case of Saldanha Steel alone – again, for reasons that appear to be essentially related to the optimisation of multinationals income and the restriction of competition.
The main problem at AMSA has always been the fact that its operation is financially constrained by a limiting and obsolete business model influenced by the fact that the parent owns competing carbon and stainless steel production assets just across the Atlantic ocean in Brazil, and in that the management and its board appear to be reduced to box ticking, with almost non- existent independent oversight resulting in insufficient capital and operating expenditure required to change strategy and restructure its operations to profitability.
AMSA’s management team reports that it plans to spend R2.7bn of shareholder funds for the winding up of its longs business.
These funds can and should be used to contribute towards the optimisation of its longs business for long term profitability and sustainability – rather than putting 3 500 employees into hardship and financial disrepair in an economy where unemployment is quoted at 32% to 41%.
Networth has proposed a robust turnaround plan for the whole of AMSA operations that is feasible, high profitable, export competitive, with a comparative advantage and financeable, while AMSA’s current plan and most of the policy changes it is asking for from the government are simply not feasible and likely to result in the destruction of a massive primary steel industry with accompanying joblessness, poverty and hardship for the whole country, whether AMSA policy proposals are granted or not granted, especially when one takes into account the impact of such closures on South Africa’s infrastructural SOE’s.
The economy cannot afford to finance a failed manufacturing and loss-making concern that it seems, its headed towards bankruptcy.
Harold Vermaak is the CEO of Networth Investments.
BUSINESS REPORT