IDC, China ink deal to take on ArcelorMittal by 2017

2014-09-14 15:00

The state’s long campaign to break the steel monopoly of ArcelorMittal SA (Amsa), took a decisive step this week with the Industrial Development Corporation (IDC) announcing it may have a new R50?billion “low-cost iron and steel facility” up and running in 2017.

The IDC announced a memorandum of understanding with China’s Hebei Iron and Steel to complete a feasibility study for the new plant?– hopefully before April next year.

The envisaged steel plant will ultimately produce 5?million tons of steel a year compared with the total capacity of about 7?million tons at all Amsa plants in South Africa.

It will be largely based on the immense magnetite iron-ore resource the IDC and the same Chinese partner took control of early this year when they bought Palabora Mining Company from Anglo American and Rio Tinto for R3.5?billion.

The project has been in the works for years, and the IDC announced it was doing the initial prefeasibility study in 2012. The first phase of the new steel plant is planned for 2017, IDC CEO Geoffrey Qhena told City Press this week.

He signed the memorandum of understanding with Hebei in Tianjin, where the IDC is part of the South African delegation at the World Economic Forum meeting held there this week.

As with the Palabora deal, the major party is Hebei Iron and Steel and the China-Africa Development Fund (CAD).

It does not include the two other parties to the Palabora deal?–?commodity traders Tewoo and General Nice Development.

The eventual shares in the project are not being made public yet, but according to Qhena, the IDC’s stake is likely to be larger than the 20% it took in Palabora.

At the same time, it is “unlikely” the IDC will control it by owning more than 50%, according to Qhena.

The role the IDC played in conceptualising the steel mill and funding the prefeasibility study “will be reflected in the shareholding”, says Qhena.

It will be the IDC’s largest steel investment since it built the Saldanha steelworks in a joint venture with the old Iscor between 1996 and 1999. It later sold its 50% stake.

The IDC will also not say how much of the estimated capital expenditure of up to $5?billion (R55?billion) it will fund, except to say it will put up its portion in debt and in equity. If the IDC’s share is between 20% and 50%, its part of the funding will likely be between R10?billion and R20?billion.

The “key thing” the feasibility study will have to establish is where to build the steel plant, according to Qhena.

One option is the Palabora Mining Company in Limpopo, near the source of its ore. Another is near the source of demand, the Witwatersrand. Coastal sites are also under consideration, given that much of the steel is likely to head to other African markets, he says.

State plans to build a new steel company when Amsa is struggling financially and using less than its full capacity have been criticised before. “Steel plants, by their nature, go through cycles,” adds Qhena.

The expectation that the southern African region will continue to grow at relatively high rates “should make it sustainable”.


The point of the new steel plant is to introduce “competitive prices” to the local steel market, according to the IDC media statement this week.

But there will not be any “developmental price” agreement or price control, according to Qhena.

The new steel plant also will not rely on a subsidised supply from Palabora or become vertically integrated with it.

“If we got in and the steel price did not fall, we will have failed,” he adds.

The promise of cheaper steel mostly rests on the fact that magnetite ore is cheaper than the hematite ore used by Amsa.

That advantage might not last forever as magnetite prices have been escalating. Last year, Palabora saw magnetite prices rise by 23% to R1?231 a ton due to surging demand.

Palabora seemingly already acts as Hebei’s integrated iron ore supplier.

It has ramped up its magnetite sales from less that 2?million tons in 2008 to 6.5?million tons last year with plans to increase that to 10?million tons.

Palabora is technically a copper mining company, but magnetite now makes up most of its revenues, with virtually all of its R2?billion in profits last year coming from the mineral.

A decade ago, the company was selling less than 300?000 tons of magnetite a year. The vast majority of sales go to a single unnamed customer in Asia (probably Hebei), according to Palabora’s last annual report as a listed company.

Stopping Hebei from using Palabora as a magnetite supply for Chinese steel mills is “one of the reasons” the IDC invested in it to begin with, according to Qhena. “We will ensure the ore is here. We will beneficiate most of it.”


The IDC has been putting significant amounts of money into the steel value chain, mostly related to the mills that use scrap metal as an input instead of iron ore.

.?In 2012, it bought 74% of Scaw Metals from Anglo American for R3.4?billion. Scaw produces

steel products from scrap metal.

.?The IDC funded the R400?million Agni Steels project in Coega, which became operational this year. It owns 10% of the company alongside an Indian majority shareholder and a BEE consortium. Like Scaw, Agni uses scrap to produce steel.

.?The IDC earlier put R100?million into Iron Mineral Beneficiation Services, a company converting useful fine ore into briquettes that can be used instead of scrap. It owns 33% of this.

The other major thrust of state support for steel is regulating the inputs.

Since January last year, the International Trade Administration Commission of SA has introduced an export control system for scrap metal that favours local producers, including those the IDC has bought or helped develop.

There have also been hints that iron ore could be declared a “strategic mineral” to curb exports.

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