Ziscosteel — What went wrong?

26 Mar, 2017 - 00:03 0 Views

The Sunday News

Economic Focus, Butler Tambo
THE collapse of Ziscosteel from an economic giant reads like a script in a horror movie and in this installment, one tries to uncover what went wrong at the parastatal. To understand the whole script, one needs to understand how it was formed.

Iron and steel production on a commercial scale in Zimbabwe started in 1938 when an electric arc furnace of capacity 12 000 tonnes was imported by a few individuals in Bulawayo. The furnace used steel scrap to produce steel castings and rolled sections.

In 1942, the colonial government established the Rhodesian Iron and Steel Commission (Riscom) to take over all iron and steel production in the country and to develop the huge iron and limestone deposits at Redcliff. During the first seven years of operation Riscom experienced a lot of financial problems. These problems were mainly a result of lack of experienced personnel and low level of production which meant high unit costs.

In 1954, 1,7 million pounds sterling had been written off as irrecoverable. In 1956 when the loss-making situation was turned into a profit-making situation, mainly as a result of an increase in the market with the formation of the Federation of Rhodesia and Nyasaland, moves to denationalise the industry were taken. In 1957, a consortium of local and overseas interests formed the Rhodesian Iron and Steel Company (Risco) which took over from Riscom. The government’s shareholding in Risco was 10,7 percent. The other shareholders were Messina Transvaal (SA) with 24,2 percent, Anglo American Corporation with 22,6 percent, Stewarts and Lloyds (SA) with 14,5 percent, Lancashire Steel (UK) also with 14,5 percent, Roan Select Trust (UK) with seven percent and Tanganyika Concession holding the rest.

The government retained the distribution side of the undertaking through the Rhodesian Steel Sales Corporation (Rhosales) in which the South African Iron and Steel Corporation had shares. By 1965, Risco employed around 2 900 people. After Independence in 1980, it was renamed Zimbabwe Iron and Steel Company and by 1990 employed about 5 500 people and indirect employment was around 50 000. Ziscosteel played an important role as a foreign currency earner as 80 percent of its products were for export and as generator of employment and by 1984 it was the largest foreign exchange earner in the manufacturing sector and the largest single recipient of Government subsidy-a subsidy equivalent to almost two percent of GDP.

Availability of raw materials for Ziscosteel driven economic revival

Zimbabwe is well endowed with the basic raw materials used in the production of iron and steel, namely iron ore, limestone and coal. Iron Ore: Known reserves of iron ore are estimated at 3 700 million tonnes, of iron content of between 40 percent and 62 percent. The reserves are found around Zvishavane, Kwekwe and Harare. Iron ore was mined at Buchwa and Ripple Creek where measured reserves are estimated at 20 million and 70 million tonnes respectively and iron contents of the two deposits are 61 percent (Buchwa) and 54 percent (Ripple Creek). Considering the fact that in some European countries ores of about 38 percent iron content are being mined, it would follow that the iron ores in Zimbabwe still have a long way to go before depletion.

Limestone: Zimbabwe has about 200 million tonnes of limestone. The biggest deposits are just a few hundred metres from the Redcliff works. These deposits are so large that they will not be exhausted in the near future.

Coal/Coke: Zimbabwe boasts about 22 billion tonnes of coal of which about 6,9 billion is commercially exploitable. At the 1991 rate of production the reserves were estimated to last another 1 760 years.

Decline of Ziscosteel: UDI Sanctions and Import Substitution Industrialisation (ISI)

The reasons for the decline of Ziscosteel are not very clear, but they date back to the UDI era. In the early stages of the development of the iron and steel industry, one can therefore say the industry was inward-looking. This was, however, in line with the Government’s ISI strategy adopted soon after World War II in an effort to counter the shortages caused by the war.

The inward-looking policy did not last long. The financial problems faced by Risco led to the expansion of the plant which was not matched by increases in demand. The only way to cope with increased output was to export the excess over domestic needs. A deliberate move to make the industry an export enclave was taken during UDI when the Government was in desperate need of foreign currency to sustain the war effort and to save the economy from total collapse. The industry was ideal for this purpose as it was the biggest industry whose products were easily marketable on international markets as long as they were not highly processed.

From 2000, Ziscosteel operated without a fully constituted board and its blast furnaces were no longer functional while its plants and equipment was now obsolete. In 2006, a National Economic Conduct Inspectorate report noted looting of Ziscosteel with the company finances being raided through questionable contracts and string of payments covering controversial purchases, services, airfares, hotel bookings, director’s fees, management expenses and entertainment allowances.

There were also many questionable payments that Ziscosteel made to South African companies for technical services and to restructure its balance sheet and debt profile. By 2010, what was once one of Africa’s largest integrated steelworks was a mass of antiquated machinery and could hardly pay its depleted workforce. The steelworks could hardly pay its depleted workforce, largely consisting of manual staff, after sustained losses and gross abuse of resources.

Ziscosteel Debt and collapse of its takeover bid

Ziscosteel had two major debts, one to a Chinese bank and the other debt involved a $240 million from a German bank and any new investor had to make a commitment to liquidate this debt. At first, 12 companies expressed their interest and these were Jindal Steel, Sino Zimbabwe, Essar Africa Holdings Limited (EAHL), Sovereignty Capital, Arcelor Mittal, China Metallurgical Group Corporation, Arcadia Steel Energy and Mining, Apollo Steel, Zimlantic Export & Import (Pvt) Ltd, Posco, AMC Corporation and Murray & Roberts. The Government rejected bids from Arcelor Mittal South Africa, a unit of Lakshmi Mittal’s Arcelor Mittal, and Jindal Steel & Power of India, which had partnered with a local consortium, Gateway Zimbabwe that had roped in South Africa’s Industrial Development Corporation and the Development Bank of South Africa.

In November 2010, EAHL emerged as a winner as its accounts showed it had a balance sheet size of $3,4 billion and a gearing ratio of 23 percent. Given that the gearing ratio is generally a measure of a company’s exposure to debt obligations, EAHL demonstrated a greater capacity to borrow or raise capital compared to the others. The deal was finalised in August 2011 as EAHL was required to inject an initial $750 million in fresh capital towards the revival of Ziscosteel. EAHL was going to take over the Government of Zimbabwe’s Ziscosteel related (internal and external) debt obligations amounting to approximately $340 million.

In terms of the agreement, the Government of Zimbabwe was set to benefit from the resumption of operations at the steel plant, which would provide raw materials for the local manufacturing industry. About 3 000 jobs at the company were to be saved and the benefits would cascade to the families of the employees. The major shareholders, EAHL and the Government of Zimbabwe were to ensure that workers were paid their dues and also agreed on the beneficiation of the low quality, vast iron ore (less than 50 percent iron content) reserves in the country. EAHL intended to bring a small number of experts into Zimbabwe to train staff in the initial stages of operations and would to a large extent make use of local skills.

The parties created another mineral holding subsidiary called NewZim Minerals in which the Government of Zimbabwe held a 20 percent stake and the rest would be in the hands of EAHL. This is where the problems emerged, as that caused serious friction and consternation in Government. It was only at the point of implementation of this part of agreement that issues about Ziscosteel ownership of mineral claims of Buchwa, Mwanesi, Ripple Creek and Bimco iron ore reserves started to emerge and caused friction that led to the collapse of the deal and loss of jobs and the whole investment after clashes between the Ministries of Industry and Commerce and that of Mines and Mining Development.

Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on [email protected] or by liking the Facebook page- Centre for Public Engagement.


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