Steel producer ArcelorMittal South Africa (AMSA) has approach the National Energy Regulator of South Africa (Nersa) directly with a request for discounted electricity tariffs as part of a multipronged business sustainability action plan unveiled after the JSE-listed group slumped to a R1.6-billion headline loss in the six months to June 30.
CEO Wim de Klerk, nevertheless, has expressed a degree of frustration that, following more than a year of discussion with Eskom regarding a more favourable tariff dispensation, the State-owned power utility only recently indicated that AMSA should, instead, “fight its own battle” before the regulator.
The steel producer has presented its case for a negotiated pricing agreement (NPA) to Nersa, but is also paying close attention to the outcome of an approach to the regulator by Silicon Smelters for a two-year NPA. The Ferroglobe subsidiary says an NPA will enable it to restart ferrosilicon production at plants in the Limpopo and Mpumalanga provinces and Nersa recently called for public comment on the tariff proposal, which is supported by Eskom.
“We were under the impression that we were at the front of the queue with Eskom regarding our request for a different tariff. But Silicon Smelters was pushed by Eskom to the front of the queue and there is now a public-participation process on their request,” De Klerk explains, adding that AMSA will probably follow suit.
The company will not be drawn on the details of its NPA submission, but argues that, in the context of Eskom’s current surplus, South Africa’s prevailing recession and the hardship being experienced by the steel industry, it has a strong case for tariff relief.
In fact, De Klerk reports that the winter tariff being paid by Saldanha Steel, in the Western Cape, has been benchmarked to be 180% more expensive than the highest power prices paid elsewhere within the bigger ArcelorMittal Group. During winter, Saldanha Steel’s tariff rises to $0.22/kWh, from $0.06c/kWh in summer.
AMSA’s quest for electricity tariff respite also forms part of a broader action plan aimed at improving the sustainability of the company, which De Klerk acknowledges remains “vulnerable”, owing to the decline in domestic steel demand to a seven-year low, raw-material cost pressures and exchange-rate volatility.
The action plan also signals something of a shift from the group’s previous focus on securing import protection, which has resulted in the introduction of 10% duties across a range of flat- and long-steel products over the past two years.
In addition, AMSA has attained support from government for an International Trade Administration Commission of South Africa (Itac) determination in support of the imposition of safeguard duties on hot-rolled coil (HRC) and plate. The three-year safeguard, which has been communicated with the World Trade Organisation, provides additional protection of 12% on HRC and plate in the first year, declining to 10% and 8% in the outer two years. Given that HRC and plate already enjoy base protection of 10%, the effective duty will rise to 22% once the safeguard is implemented.
De Klerk says AMSA did not see much more scope for protection for primary products, but is currently working with Itac and the metals industry to secure protection for downstream steel products, which have become increasingly vulnerable to the threat of imports since the introduction of duties on primary-steel products.
The new action plan will also involve a review, which will be finalised within weeks, of AMSA’s procurement practices and its operational footprint and efficiencies, as well as the group’s commercial practices from both a product and market perspective.
De Klerk indicates that the outcome could result in “structural changes”, particularly at its Newcastle mills, which could affect jobs. AMSA currently employs over 8 600 people directly and more than 3 200 contractors and has already started to implement changes in the way contractors are deployed, as well as how overtime is managed.
In addition, the group’s product range and the scale of its operations are under investigation, with De Klerk indicating that it may well streamline its product mix, particularly in areas where South African Bureau of Standards quality rules are being bypassed. However, there is also a strong likelihood that various other low-volume products would be culled from AMSA’s range.
The group is also reviewing its various investments and property holdings to assess whether these remain core, or should be disposed of in an effort to improve its overall financial position. Its assets at the end of June stood at R34-billion, including a cash balance of R3.7-billion.
Besides its extensive property holdings in Pretoria, AMSA also holds 50% in Macsteel International and Consolidated Wire Industries, the Zandrivierspoort iron-ore project and an iron-ore prospect in the Northern Cape, as well as 5% of Coal of Africa Limited.
De Klerk stresses that no decisions have been taken to classify any of these holdings as noncore, but indicates that asset sales could be considered in future, as could a further rights issue should its balance sheet require a rebalancing between debt and equity.