Last week, ArcelorMittal South Africa, the continent’s largest steelmaker, announced the winding down of its Newcastle and Vereeniging operations starting from January 2024. (David Harrison/M&G)
A year ago, Harvard’s Growth Lab gave its prognosis for South Africa’s ailing industrial sector.
In a working paper, Andrés Fortunato — who worked alongside Ricardo Hausmann on the research centre’s latest, and highly anticipated, assessment of South Africa’s economic quagmire — surmised that the country’s post-2008 deindustrialisation was “exceptional”.
According to the paper, when compared with other developing countries, South Africa had one of the largest falls in manufacturing jobs and output. During the 10 years after the 2008 global financial crisis, the drop in the manufacturing employment share was the same as during the 30 years preceding 2008.
The sector also saw an unusual collapse in output compared with the rest of the world.
These results strongly suggest that local factors are to blame, Fortunato concluded.
Last week, ArcelorMittal South Africa, the continent’s largest steelmaker, announced the winding down of its Newcastle and Vereeniging operations starting from January 2024. The plant closures will put 3 500 jobs in jeopardy.
ArcelorMittal pointed to a number of factors hamstringing its business, namely South Africa’s economic slowdown — which has hit steel consumption by 20% in the past seven years — energy and logistics constraints, as well as the scrap metal ban.
Responding to the news, the Steel and Engineering Industries Federation of Southern Africa called on the president and the ministers in his economic cluster to treat the ArcelorMittal closures as a matter of urgency, noting that not doing so would precipitate “a socio-economic catastrophe of gigantic proportions in the metals and engineering industry which will reverberate throughout the economy and the continent, impacting the auto, motor, construction and mining sub-sector of the economy and all who work in it”.
The South African Federation of Trade Unions also called for action, noting that South Africa’s deindustrialisation has reached “profound levels”. Manufacturing as a share of GDP has fallen from 24% in 1990 to 12% today, the labour federation noted in its statement.
ArcelorMittal South Africa’s decline is closely enmeshed with the story of the country’s deindustrialisation — which also happens to be a cautionary tale of the pitfalls of privatisation.
When celebrated South African industrialist Hendrik van der Bijl founded state steel company Iscor, which would eventually become ArcelorMittal South Africa, its largest users were the mining industry and the railways.
According to a 2010 paper by economist Simon Roberts titled Industrial Policy Under Democracy — which delves into the histories of both Iscor and Sasol, a fellow former state-owned entity — the local requirements of the mining industry and an infrastructure boom drove major expansions at Iscor’s Newcastle and Vanderbijlpark works in 1969 and 1970. The fear of sanctions also factored into the decision to grow Iscor.
In the 1960s and 1970s, a number of emerging market economies were embarking on state-led efforts to industrialise. Countries in Latin America were borrowing heavily to fund these infrastructure builds. But when interest rates soared in the 1980s, they soon found their debt burdens untenable. In 1981 the world economy entered a recession.
This was when Iscor would soon face its first major setback, as global demand for steel suddenly fell off. In 1982, Iscor was forced into the early closure of the two oldest blast furnaces in Pretoria, as well as its so-called South Works at Newcastle.
The 1980s debt crisis ushered in a major shift in thinking insofar as developing economies were concerned. The new priority was to stabilise, open up economies to trade and foreign direct investment and to liberalise.
It was under these conditions that the Washington Consensus was forged, according to British economist John Williamson, who coined the term in 1989. The main precepts of the Washington Consensus were fiscal discipline, trade liberalisation, deregulation and the privatisation of state assets. This flew in the face of conventional wisdom in developing countries, many of which previously embraced state-dominated systems.
Also in the late 1980s, the apartheid government — which was feeling the strain of its worsening financial position — initiated the privatisation of Iscor.
According to Roberts, Iscor’s privatisation was followed up by a period of liberalisation, during which tariffs on steel were radically reduced. Said liberalisation triggered the rationalisation of Iscor’s operations and employment was cut sharply.
Then came the unbundling of Iscor’s mining and steel assets, which was part of a strategy to refinance Saldanha Steel’s debt. The Saldanha Steel mill was a joint venture between Iscor and state-owned financier the Industrial Development Corporation, which owned a 16.6% stake in the state steelmaker.
Iscor’s profitable mining division was listed as a separate entity, Kumba Resources, in November 2001. But Iscor retained the right to buy iron ore from Kumba at the cost of local production plus 3%.
That year, seeing an opportunity to get its hands on South Africa’s iron ore at a bargain price, UK steel producer LNM Holdings (which was later renamed Mittal Steel) bought a 34.8% stake in Iscor under a strategic three-year business assistance agreement. The agreement provided for the option to acquire a further 10% when certain performance targets were met. LNM eventually acquired a controlling stake in Iscor which subsequently became part of the Mittal Group.
As Roberts puts it, Mittal — which in 2006 became ArcelorMittal — effectively acquired one of the lowest-cost steel producers in the world, which had become that way through the state’s subsidisation of the company.
Some months after Roberts’ paper was published, Kumba cancelled its preferential pricing deal with ArcelorMittal, putting it at the mercy of the market.
Meanwhile, South Africa’s manufacturing sector suffered, having lost access to cheap, locally produced, steel. And it was only a matter of time before the country’s deindustrialisation would hit ArcelorMittal.
ArcelorMittal South Africa might point to the state’s more recent efforts to regulate the steel industry — such as the scrap metal measures, introduced to curb theft as well as the environmental impact of smelting — as reasons for its current struggles.
But the steelmaker’s history suggests that ArcelorMittal, and indeed the country’s industrial sector more broadly, is the victim of a regressive macroeconomic strategy adopted a long time ago.