ArcelorMittal Plant Review May End Hard South African Lesson

  • ArcelorMittal unit studying future of plant on west coast
  • High power costs in winter make the operation unviable

The future of a steel plant built in an ambitious partnership between South Africa’s government and industry is in doubt after the local unit of ArcelorMittal said it is reviewing the viability of the Saldanha mill -- commissioned for $1 billion in 1997.

The plant was dreamed up by the Industrial Development Corp., a state-owned financier, which enlisted Iscor Ltd. as a partner before billionaire Lakshmi Mittal’s steel group agreed to buy a majority stake in the South African steelmaker in 2001. By then, Saldanha, which lies on a natural bay about 150 kilometers (90 miles) north of Cape Town, had lost at least $223 million.

Map: Saldanha, in South Africa’s Western Cape province
Map: Saldanha, in South Africa’s Western Cape province

While the mill was expected to benefit from some of the cheapest electricity produced in the world when it was built, power prices have almost quadrupled since 2007 when the cost of a build program started to weigh on power utility Eskom SOC Ltd.’s margins. Saldanha operates profitability during summer, but can’t make money during three winter months when Eskom charges industrial customers triple the usual rate, ArcelorMittal South Africa Ltd. Chief Executive Officer Paul O’Flahertysaid Thursday during a conference call.

“Saldanha Works’ future and the environment we are working in is something we’re currently reviewing,” said O’Flaherty, who is leaving the company Feb. 12. “When it comes to the winter months in Saldanha, it is clear that the extremely high electricity tariffs, which are three times higher than in the summer months, doesn’t make it a viable proposition.”

Rail Journey

The plant converts local iron ore railed 860 kilometers from mines at Sishen to the northeast into steel sheets about 1 millimeter thick and employs some 600 people. Increasing costs have proved to be just part of the problem for Saldanha. It has also been confronted by a global glut spurred by cheap Chinese exports.

ArcelorMittal South Africa last recorded an annual profit in 2010. It’s loss excluding one-time items will be 22 times larger in 2015 than a year before, while the company will book an impairment charge of 4.3 billion rand ($272 million), including a 3.6 billion rand writedown on Saldanha, O’ Flaherty said. Its shares have fallen more than 90 percent over the last six years, valuing the company at about 8.71 billion rand.

“An independent electricity solution is critical for Saldanha,” O’Flaherty said. “Gas is our best option, based on where we see gas prices. On a stand-alone basis it is not going to be feasible, so we need other off-takers.”

While Saldanha could prove a costly lesson for South Africa, history may yet repeat itself.

The IDC, as the state-owned financier is known, is completing a feasibility study for a $5 billion mill with Hebei Iron & Steel Group and will make a decision on whether to proceed by the middle of this year, Abel Malinga, head of mining at the group, said in September.

“We know it’s not a cool thing to do right now, but the kind of planning and investment we are looking at is long term,” Malinga said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE