This article first appeared in the Business Times section of The Sunday Times on 21 February 2016
THIS week’s news that eMalahleni-based Evraz Highveld Steel & Vanadium is considering liquidation and putting 2 187 jobs at risk was not only depressing but also highlights how global and domestic market dynamics impact the average Joe.
A perk of my work is disseminating what is often considered complicated and overly technical business news, in a manner that can be easily understood without dumbing it down.
The story of Highveld Steel is a sad opportunity for us to appreciate how market dynamics, and supply and demand, can shut down a market leader and put the man on the street, literally back on the streets.
In case you missed it, Highveld, once a doyen of South African industry, is facing liquidation mainly due to a glut caused by slowing global demand, which has resulted in cheap Chinese imports hitting our shores, making it near impossible to remain competitive.
This has led to parent company Evraz having to walk away from its investment and, more importantly, to 2 187 households losing their primary source of income.
According to its website, Highveld was established in 1957, when Minerals Engineering of Colorado built a plant in eMalahleni to produce 1.4 million kilograms of vanadium pentoxide a year.
Two years later, Anglo American acquired a two-thirds share. In the early 1960s, another company, the Highveld Development Company, was established to investigate the viability of processing titaniferous magnetite ore for the production of liquid pig iron and vanadium-bearing slag.
The process to build an integrated iron and steelworks business started in 1964 and by June 1965, the company’s name had been changed to Highveld Steel and Vanadium.
A year later, Highveld was the global leader in vanadium production.
The next 30 years saw the company making acquisitions in companies producing manganese alloys, ferrosilicon, char, drums, pails, crown closures and stainless steel; as well as entering new markets in Austria, Japan and Spain.
Things looked up when in 2007, Luxembourg-based Evraz, one of the world’s largest vertically integrated steel and mining companies, completed its takeover of Highveld, by buying out Anglo American and Credit Suisse.
However, eight years later, in April 2015, the company went into business rescue after sustaining considerable losses for many years. Following lengthy consultations, over 90% of the company ’s independent creditors selected Hong Kong-based International Resources Ltd (IRL) as the preferred bidder for the business.
However, it wasn’t long until parent company Evraz approached the courts seeking to declare the business rescue plan of its South African subsidiary invalid.
Total creditors claims were R1.2-billion and IRL was offering a settlement of R380-million.
Clearly Evraz had done the calculations, and figured out that a shutdown of Highveld would be a better outcome than 31.67 cents in a rand and the rebirth of a competitor. Media reports at the time pointed to the possibility of Evraz standing to gain by letting Highveld go into liquidation.
“Evraz is one of the world’s largest producers of vanadium, and liquidating Highveld would take about 10% of supply out of the global value chain for the alloy, which is used in making products such as high-speed tools and jet engines. When Evraz bought Highveld it was forced by European Union competition authorities to divest of certain vanadium assets,” reported Business Day.
This opposition from Evraz eventually left Highveld in the lurch, forcing a production shutdown in July 2015, with no messiah in sight.
In October 2015, the company, in consultation with the unions, decided to apply for the Department of Labour’s training lay-off scheme, as a means to minimise the impact of retrenchments on employees. Instead of being retrenched, 600 employees would be trained in various skills and receive a cash stipend for six months.
The company’s application was approved on October 20, 2015 and training commenced on November 26, but the cash never came.
On February 8 the Department of Labour informed the company of its decision to “pause” its payment for the layoff scheme stipend, in response to the announcement that the IRL transaction had failed.
The company was forced to fork out millions, not budgeted for, to meet salaries for November and December 2015 and January 2016 — all during a time of zero production.
Without the funds from the lay-off scheme, and no IRL transaction, the company was forced to notify workers it wouldn’t be able to pay salaries at the end of this month — hence the possibility of liquidation.
The irony of all this is that Highveld is still South Africa’s second-largest steel producer.
The company has been a leading steel producer for more than 50 years and was ranked among 15 leading steel producers around the world.
When the country’s second largest steel producer is facing liquidation, it clearly spells disaster for South Africa’s steel industry as a whole. The government, through the International Trade Administration Commission, has tried to protect the industry by increasing the structural steel import duty.
However, it seems it’s all “too little, too late” for Highveld.
The company is now facing the end of the road and its 59- year history looks very likely to come to an end. Liquidation is by far the most likely outcome.
Creditors are likely to get nothing, given that the South African Revenue Service preferential claim stands at an estimated R550-million.
More importantly, though, all employees will immediately lose their jobs and receive no severance packages.
Rest in peace, Highveld. Condolences to the 2 187 families