100,000 South African jobs on the line

Arcelor Mittal’s decision to shut down its longs steel business could lead to up to 100,000 job losses, and government intervention will not be enough to prevent it.

On Monday, 6 January, ArcelorMittal announced that it will move forward with its plans to wind down its longs steel business.

In the steel industry, “longs” refer to long steel products primarily used in construction and infrastructure projects. These products are used in key sectors like rail, mining, and energy.

Initially, estimates suggested that 3,500 jobs would be lost as a result of ArcelorMittal’s decision. However, estimates now suggest that 100,000 jobs could be lost.

The Department of Trade, Industry and Competition (DTIC) has said it will continue to work with ArcelorMittal to find a solution for challenges in the local steel industry.

However, according to Donald MacKay, CEO at XA Global Trade Advisors, who spoke on The Money Show, if the government steps in to save ArcelorMittal, these job losses would simply shift to small mills.

The reason for this 100,000 job loss figure, MacKay explained, is that job losses will extend far beyond the direct job cuts.

“According to ArcelorMittal, there are certain downstream sectors that are absolutely dependent on them. If those products no longer come out, there’ll be some of them which cannot use an imported equivalent.”

The effects would also be felt in company towns like Newcastle, where a lot of the other economic activity would diminish if ArcelorMittal closed its mill.

Part of the problem comes from the fact that the government has supported both ArcelorMittal and mini-mills, which are competitors.

The International Development Corporation (IDC) invested R14 billion in mini-mills, which take scrap metal and make steel.

On the one hand, the government wants to protect ArcelorMittal, which it has done through tariffs.

On the other hand, though, the government also wants to encourage competition for ArcelorMittal.

“Government has put lots of money into these mini mills, both in terms of friendly finance from the IDC, but also other subsidies,” MacKay said.

However, this investment and subsidies – which were essentially forced discounts on raw materials – have led to an overproduction of steel.

“The effect of all of this is there’s been a huge amount of overinvestment in mini-mills.”

“There’s just way too many of them producing way more product that can be consumed, and most of that is long product.”

These products have flooded the market and the prices have dropped as a result. Additionally, the government can’t put import duties on mini-mills, since they are local producers.

All of these effects compound, and it has become impossible for ArcelorMittal to compete, he explained.

“That seems to be the nub of where the problem is – conflicting industrial policies.”

However, the problem is that if the government were to put all of its attention towards supporting ArcelorMittal and stop assisting mini-mills – those job losses would simply fall on the mini-mills.

MacKay pointed out that there is a substantial difference in supporting ArcelorMittal compared to mini-mills, though.

“The mini-mills will require support in perpetuity. There are simply too many of them. There’s too much money. It’s very hard to see that the mini mill sector is worth R14 billion.”

“There’s too much money in the sector, which means there’s too much product flowing out of the sector.”

Something has to give at some point, MacKay said. “Unfortunately, the ‘give’ in this case has been ArcelorMittal, Newcastle.”

“But something had to give. Either some of the mini-mills would have had to close or ArcelorMittal.”

“It’s not clear to me that with the supply so far outstripping local demand this could ever have worked.”

Although there is currently a full-scale review of industrial policy in the works, MacKay questioned whether it would result in any meaningful change.

“I don’t know if it’s going to work. In fact, we know so little about this review that it’s kind of hard to estimate.”

“What we do know is that the review’s incredibly pervasive – one of the biggest reviews probably ever done, certainly in the last 20 years that I can recall.”

He stressed that any changes the government decides to make in light of this review need to be communicated clearly and implemented gradually.

“Whatever happens here, whatever support is withdrawn cannot simply be taken away overnight. It has to be predictable. It has to be slow enough to allow adjustment.”

“If we simply stripped the duties away, it would be devastating for all concerned,” MacKay added.