ArcelorMittal South Africa Delays Wind-Down Of Longs Business Amidst Strategic Stakeholder Engagements

On 29 January 2024, in a trading statement, ArcelorMittal South Africa (AMSA) provided an update on diligence and consultation progress in relation to their “Longs Business”. This follows the well-publicised notice on 28 November 2023, where shareholders were advised that ArcelorMittal South Africa’s Board and Management had no option but to embark on a process that contemplates the wind-down of the company’s Longs Business.

Listing the reasons for this decision, among others, as:

• A slow economy and difficult trading environment including low demand.
• National constraints beyond the control of the Company, and in particular, high transport and logistics costs as well as energy prices, exacerbated by the well-publicised logistics failures and their resultant cost impact, and the prevailing electricity challenges which the country faces.
• Scrap advantage over iron ore with respect to steel production as a consequence of policy.

Since making the announcement, ArcelorMittal South Africa has been engaging with various stakeholders, including the Government, represented by, among others, the Minister of Trade, Industry and Competition, Transnet, the IDC, numerous industry associations and institutions, organised labour, affected and interested customers, suppliers, and community forums, amongst others.

These stakeholders have expressed widespread concern regarding the negative economic impact of the closure. The Company was requested to consider what support was needed to change the closure decision. ArcelorMittal South Africa reiterated that it did not need any preferential treatment or subsidies; rather, it required the Government to ensure that a level playing field exists for South Africa’s primary steel producers, by addressing the structural constraints affecting the steel industry.

The engagement process has been constructive. Understandably, however, finding solutions to the structural shortcomings highlighted above is complex. Reversing the closure decision holds substantial risks and requires the commitment of, at a minimum, the Company, its customers and suppliers, the Government, state-owned enterprises, and employees.

On 8 February 2024, ArcelorMittal South Africa released its financial results for the year ending 31 December 2023, in which it noted that the deferral of the wind-down of Longs steel product operations (“Longs Business”) enabling it to continue to operate for up to six months, to allow time to (i) progress, conclude and secure benefits arising from identified short-term interventions, while (ii) progressing the development of additional medium- and longer-term interventions focused on business sustainability.

In the media statement, the company notes that: As a result of ongoing intensive engagements with all key stakeholders, ArcelorMittal South Africa is able to announce the deferral of the wind-down of the Longs Business to allow for its continued operation for up to six months. During this time, the objective is to further progress and conclude the short-term initiatives, followed by their implementation to secure the targeted benefits.

The short-term initiatives that are being progressed include:

• Port and rail service efficiency improvements in engagement with a Transnet leadership who have demonstrated firm intent to cooperate with the Company to narrow the current cost gap, and an undertaking to work together towards addressing further cost optimisation opportunities;
• The export ban on steel scrap was not extended in December 2023 as a first step in addressing those policy measures which gave an artificial cost advantage to lower quality scrap-based steel makers, to the disadvantage of integrated steel making facilities that beneficiate mined raw materials (specifically, iron ore).

The Company will continue to engage with the Government on continuing concerns regarding steel scrap metal, which, amongst other matters, threaten the existence of small- and medium-sized scrap entrepreneurs and traders;

• Expediting demand-side opportunities to improve capacity utilisation in the absence of economic growth, and, as envisaged in the Steel Masterplan, to replace imports and facilitate exports. This includes anticipated projects which require investment to increase the local application of high-quality steel profiles;
• Ensuring that trade protection measures, which are low in international terms, are enforced and companies illegally contravening the rules do not continue to do so;
• Agreement with key customers to a longer-term volume commitment and localisation efforts to create sustainable local supply and enlarge the downstream manufacturing capability to the benefit of both local manufacturers and the Longs Business;
• Working with key suppliers, service providers, and organised labour to reduce the cost structure of the Longs Business.

The timing of the deferral is subject to these in-principle agreements being commercially and contractually concluded. Although the short-term initiatives do not fully address the structural shortcomings highlighted before, taken together, these interventions allow for the time and opportunity to defer the wind-down decision without prejudicing the sustainability of the Company.

ArcelorMittal South Africa will continue to monitor its working capital requirements over the deferral period, which will extend for a period of up to six months, to ensure that there is sufficient access to liquidity. In this regard, in the interest of prudent liquidity management, the Company is in the process of applying for an additional working capital facility up to R1 billion, which may be called upon to support continued operations.