Steel maker Evraz owes creditors R1.2bn

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This is just the latest development in a troubled sector, beset by weak demand, poor rail infrastructure, rapidly rising labour and energy costs, and the added burden of electricity supply disruptions.

Longer-term potential costs

Business rescue practitioners estimate R1.2bn of debt is owed to Evraz's trade creditors, including a shareholder loan of R350m. But far more economic damage lurks beneath the surface of the slow demise of the Russian-backed one-million tonne a year capacity steel producer. Apart from the damage to livelihoods, there are a number of longer-term potential costs that remain hidden.

In 2012, French global industrial gases company, Air Liquide, secured a 20-year supply contract with Evraz. Unlike other creditors, its possible losses span nearly two decades into the future. This includes recouping investment in a recently completed 40m (at 2012 prices and exchange rates) air separation unit that provides 770 tonnes of oxygen a day to Evraz Highveld's stalled production process.

The deal followed the ending of a long-term gas supply contract between Evraz Highveld and beleaguered industrial gases supplier African Oxygen (Afrox), after irregular supply hurt steel and vanadium output.

To give an idea of the multiples involved, late last year Afrox signed a 10-year contract extension with SA's third-largest steel producer, Scaw Metals Group, for the supply of 50 tonnes of oxygen a day to its steel works in Johannesburg. This is worth more than R400m.

Understandably, Air Liquide is tight-lipped about the future of its contract. "We have engaged with the business rescue practitioners... and discussions are ongoing. Our gas supply contract is still in place and is ongoing," Air Liquide Southern Africa communications manager Elana Pienaar says. "Unfortunately we are unable to respond to the rest of your questions, as the information requested is confidential."

SA's steel industry unravelling

The rapid unravelling of SA's steel industry in recent weeks might put more steel production into empowerment hands at bargain-basement prices. Evraz Highveld's estimated replacement cost is R30bn, although its assets are worth only R1.5bn.

Scaw Metals is already majority-owned by the state-mandated Industrial Development Corporation and empowerment interests. Meanwhile, ArcelorMittal SA is again making noises about selling some of its assets to empowerment interests. But for now the future of the South African steel industry remains extremely muted. Costs for any new owners will remain volatile and high.

Growing need for government to support South African steel producers

"Locally, the economy is nearly at a standstill due to electricity supply constraints, infrastructure development delays and the low spending in the mining sector," the steel giant says.

The company has just reported a diluted headline loss per share of 27c for the six months ended June compared with a loss of 2c last year. To this end, ArcelorMittal SA and Evraz Highveld have lobbied for import tariffs of between 10% and 15% on much cheaper Chinese steel that has flooded SA's markets.

But this may not be enough to forestall the threatened closure of part, or all, of its specialised long steel works in Vereeniging by the end of the month. "There is an urgent need for government policy to support South African steel producers," the country's premier steel producer says. "Import tariffs and designation of primary steel for localisation are key elements that need to be addressed to ensure the sustainability of the domestic steel industry."

ArcelorMittal SA also wants a new pricing deal with Kumba Iron Ore for the supply of up to 6.5-million tonnes of iron ore a year. The existing cost plus 20% iron ore sale agreement between the two companies comes from years of ill-tempered legal machinations regarding the government, black economic empowerment and the company's mineral rights.

While this benefited the group hugely when spot iron ore traded at $134 a tonne, it has cost it much more than this since iron ore fell to about $55 a tonne.

Meanwhile, ArcelorMittal SA's net financing costs have risen to R352m in the half-year to June compared with R207m in the previous period.

Source: BDpro