Steel group ArcelorMittal South Africa (AMSA) has confirmed that the Industrial Development Corporation (IDC) is considering taking a larger equity stake in the JSE-listed group and will conduct a due diligence over the coming six months to assess its position.

This, after a deal was reached to again defer the winding down of AMSA’s long-steel businesses – this time for six months.

On March 31, the IDC approved another R1.68-billion in funding support to AMSA to ensure that the Newcastle blast furnace, in KwaZulu-Natal, was not turned down as planned, as well as to also sustain AMSA’s longs operations in Vereeniging and eMalahleni.

In January, AMSA announced that it would wind down the longs business by the end of February, citing ongoing losses and various structural impediments to the unit’s continue competitiveness.

These impediments included government’s scrap policy, which AMSA said placed Newcastle at an unfair disadvantage when compared with domestic electric arc furnace steelmakers, limited import protection and enforcement, rising electricity prices, as well as expensive and unreliable rail services.

The longs business remained operating during March after the IDC extended an initial R380-million loan and the latest loan is linked to a Temporary Employee Relief Scheme (TERS) grant to assist with employee costs. The final TERS amount is yet to be determined and will reduce the amount that AMSA draws down against the IDC’s new R1.68-billion facility.

INTERIM SOLUTION

AMSA CEO Kobus Verster says the latest deferral represents an interim solution and the intention now is to find a permanent solution by the end of August.

The IDC loan does not include any equity conversion obligation, but Verster confirmed that the State-owned financier saw AMSA as a whole, including the longs business, as “strategic” and had expressed a desire to increase its shareholding beyond its current 8.2%.

Therefore, the IDC will use the due-diligence period to “look under the bonnet and see whether they want to increase [their ownership in AMSA] and at what value”.

Absent the latest IDC loan, however, the deferral would not have been feasible. The funding meets AMSA’s condition that the longs business should not incur further losses or result in negative cashflow for the group.

“The terms are payment by agreement, and repayment out of the profitability of the longs business,” Verster reports.

Nevertheless, he also expresses optimism that there could be imminent relief in relation to some of the structural problems facing Newcastle, including changes to government’s scrap policy and the introduction of new safeguard tariffs on some steel imports.

An initial safeguard duty of 13% could be imposed on hot-rolled coil and plate, falling to 11% in the second year and 9% in the third. The South African government has also initiated a far-reaching review of the steel tariff structure for both upstream and downstream products.

Further protection for AMSA will be unpopular among steel consumers, however, with some already highly critical of the support that has been extended to AMSA over the years, which has placed pressure on downstream metals and engineering firms.

However, the deferral of the wind-down is likely to be supported by trade unions, as it also means that retrenchment consultations initiated under Section 189(3) of the Labour Relations Act have been suspended.

That said, certain areas outside the longs business may still undergo restructuring for operational reasons, with AMSA in the process of retiring a coke battery.

The company says it is in communication with its customers in a bid to clear up prevailing uncertainty about the future of the longs business, as well as to try and rebuild its order backlog, which Verster says will be key for any permanent solution.

AMSA will also be making a new application to Eskom and the regulator for more favourable electricity pricing, as is catered for under negotiated pricing agreements.

"The next six months will be crucial in determining whether the long-steel business can achieve the financial stability required for long-term viability,” Verster says.