Government policy failure at the root of ArcelorMittal South Africa's longs business shutdown

With ArcelorMittal South Africa (AMSA) starting work to shut down its long steel production by April, a new study suggests that a more balanced competitive environment could arise if the government abolishes its PPS (price preference system) and export tax, which have contributed to the rapid decline of steelmaking in the country.

An Econometrix Report on the economic impact of tax policies on South Africa's steel sector and economy finds as much as 80 000 jobs across the value chain and 3 400 direct jobs will be lost with the closure of AMSA’s long business in April.

The PPS was introduced in 2013 and mandates that scrap metal exporters sell material to local producers at discounted rates, benefitting smaller, scrap-based mini-mills at the expense of primary steel producers. The export tax, introduced in 2021, aims to replace the PPS and limit scrap metal exports, but it has failed to address the broader structural issues, such as rising costs and competition from cheaper imports, especially from China.

“The unintended consequences of government policy have resulted in declining employment, reduced exports and earnings, lost economic potential, decreased turnover, lost opportunity costs from scrap export reductions, and a negative impact on informal waste pickers,” the study said.

By contrast, the mini-mill sector benefitted significantly from the PPS, which has acted as a subsidy, maintaining profitability despite otherwise uncompetitive operating conditions. This suggests the PPS subsidy plays a big role in maintaining the viability of the mini-mills, the report says.

South Africa’s crude steel production has fallen from 9.7 million tons in 2006 to 4.7 million tons in 2024. Amid this decline, there has been a 50 percent surge in steel imports since 2018. Some 25 000 jobs have been lost in the sector since 2009; the sector's contribution to GDP has declined, export earnings have fallen, local infrastructure development has been undermined, and regional and continental trade opportunities have been lost.

“This trend reflects broader patterns of de-industrialisation and stagnation in the manufacturing sector,” the report found.

The sector has also faced substantial additional strain, such as escalating costs, including higher prices for electricity, labour, and essential raw materials like iron ore.

A key factor contributing to the global increase in production, compared to South Africa's decline, is that over 64 countries have implemented protectionist measures, while South Africa "remains one of the least protected markets, leaving its steel industry highly vulnerable," the report said.

The country’s steelmaking capacity of 10.5 million tons annually far exceeds domestic demand of just 4.2 million tons, with government-supported mini-mills exacerbating the oversupply issue, the report noted.

These mini-mills, which use scrap steel, primarily serve informal industries and struggle to meet the quality standards required by formal sectors such as automotive, mining, manufacturing, and construction, which together account for approximately 80% of South Africa’s steel demand.

According to SEIFSA (Steel Engineering Industries Federation of South Africa), capacity utilization rates among domestic mills and related subsectors are "alarmingly low", averaging 50%-55%, with some operating as low as 42%, which is unsustainable in the long term.

Many imported products are sold at prices below the cost of raw materials, undermining local producers, the report found.

Electricity costs for the basic iron and steel sector increased from less than R2.4bn in 2010 to over R8.5bn in 2023, an increase of 256%, adding to the pressure on local steel producer production prices.

BUSINESS REPORT