With the lo­cal steel in­dus­try hang­ing by a thread, and fail­ing to make prof­its, an­a­lysts say it might be on its way to be­com­ing ir­rel­e­vant to the econ­omy. Some are call­ing for im­port du­ties on steel. But oth­ers say any move to turn things around might onl

Finweek English Edition - - FRONT PAGE - BY CIARAN RYAN

South Africa’s steel out­put has fallen 20% since 2007, while China’s out­put has in­creased by a stag­ger­ing 68% (see Ta­ble 1). Over the same pe­riod, SA’s share of global steel out­put has fallen from 0.7% to 0.44%.

Si­mul­ta­ne­ously, the man­u­fac­tur­ing sec­tor is 29% larger to­day than 10 years ago and 66% larger than 20 years ago, ac­cord­ing to the South African Re­serve Bank. How­ever, its share of the econ­omy has fallen from 20% in 1983 to 16% in 2013.

What these fig­ures show is that SA is dis­ap­pear­ing into ir­rel­e­vance as a global steel pro­ducer. Ditto the man­u­fac­tur­ing sec­tor. This could ring in the end of SA’s in­dus­trial age.

In­deed, ac­cord­ing to Free Mar­ket Foun­da­tion economist Loane Sharpe, both the steel and met­als in­dus­try, con­sid­ered by gov­ern­ment to be the back­bone of its in­dus­trial pol­icy, are on their knees and may never make a full re­cov­ery.

In fact, they’re des­tined to go the way of SA’s now-de­funct tele­vi­sion and elec­tron­ics in­dus­tries, which folded 20 years ago when SA opened its borders to for­eign com­pe­ti­tion, lead­ing to lower prices and bet­ter value for con­sumers. A re­port by the Steel and En­gi­neer­ing In­dus­tries Fed­er­a­tion of SA (Seifsa) says the met­als and en­gi­neer­ing sec­tor con­tracted 2% in 2014, a sit­u­a­tion that was ex­pected to con­tinue in 2015. Pro­duc­tion lev­els are now 25% to 30% lower than at their peak in 2007. “There is more un­cer­tainty about cur­rent and prospec­tive eco­nomic growth

in the world econ­omy than a year ago,” ac­cord­ing to Henk Lan­gen­hoven, Seifsa chief economist.

“As a re­sult, de­mand grew slower and SA ex­ports gen­er­ally seemed to have lost mar­ket share in in­ter­na­tional mar­kets dur­ing the up­heaval in the af­ter­math of the fi­nan­cial cri­sis.”

What’s killing the steel in­dus­try – apart from an in­co­her­ent in­dus­trial pol­icy, low in­vest­ment in in­fra­struc­ture and elec­tric­ity sup­ply dis­rup­tions – are un­re­al­is­tic wage de­mands, ac­cord­ing to Sharp: “There may be a par­tial re­cov­ery as com­mod­ity prices pick up, but these sec­tors are now be­com­ing ir­rel­e­vant to the broader econ­omy. To put this in per­spec­tive, we need a qua­dru­pling in global steel prices from where they are now for lo­cal steel pro­duc­ers to make a profit. That’s just not re­al­is­tic.”

While this is by no means a uni­ver­sal view, there is a per­cep­ti­ble mood of panic in board­rooms of SA’s steel mak­ers, who want gov­ern­ment to im­pose im­port du­ties of 10% on cer­tain im­ported prod­ucts (see side­bar on page 19). The US, In­dia and Europe have all im­posed anti-dump­ing du­ties on cer­tain grades of stain­less steel from China, so SA would be in good com­pany.

In an in­ter­view with con­sult­ing firm McKin­sey, CEO of US Steel Mario Longhi says steel mak­ers have been asleep at the wheel while al­ter­na­tive ma­te­ri­als have eaten into its mar­ket, par­tic­u­larly in the automotive in­dus­try.

The steel in­dus­try now has to play catch-up and find new ap­pli­ca­tions for its prod­ucts. This will re­quire a tech­no­log­i­cal leap in ar­eas such as coat­ings. A South Korean f irm re­cently de­vel­oped a new form of steel as hard and light as ti­ta­nium, but less costly to pro­duce. Those with a tech­no­log­i­cal edge are most likely to sur­vive the global blood­bath.

Ac­cord­ing to the World Steel As­so­ci­a­tion, steel i mports are now reck­oned at 1.6m tons a year, equiv­a­lent to 22% of SA’s 7.2m tons of an­nual crude steel pro­duc­tion. These im­ports are tram­pling not just SA’s do­mes­tic mar­ket, but its re­gional ex­port mar­kets too. While Chi­nese im­ports to SA in­creased 42% in the first half of 2015 com­pared to the same pe­riod in 2014, they are up 23% to the sub-Sa­ha­ran re­gion as a whole over the same pe­riod.

Steel in­dus­try ex­ec­u­tives are clear on what needs to be done to fix the prob­lem: raise tar­iffs, boost eco­nomic growth (par­tic­u­larly con­struc­tion) and force paras­tatals to pur­chase lo­cally-made steel. None of this is likely to solve the prob­lem in the long term. Only a thriv­ing econ­omy will do that, and there is lit­tle prospect of that hap­pen­ing any time soon.

As Fin­week r ecent l y r epor t ed, gov­ern­ment is less than en­thu­si­as­tic about bail­ing out lo­cal steel com­pa­nies when it is busy mulling its own steel plant in part­ner­ship with the In­dus­trial De­vel­op­ment Cor­po­ra­tion (IDC) and He­bei Steel. This fa­cil­ity will not need tar­iff pro­tec­tion as it may be sup­ported by de­vel­op­men­tal pric­ing of iron ore



and coal through pro­posed changes to the Min­er­als and Petroleum Re­sources De­vel­op­ment Act.

In­dus­try and union lead­ers are in in­tense talks with gov­ern­ment over mea­sures re­quired to res­cue the sec­tor. Ac­cord­ing to the Na­tional Union of Me­tal­work­ers of South Africa (Numsa), the trou­bles ail­ing the steel in­dus­try threaten 75% of work­ing class and poor house­holds in the Vaal and New­cas­tle ar­eas, which de­pend on the steel in­dus­try for their liveli­hoods.

ArcelorMit­tal SA’s (Amsa) fi­nan­cial re­port for the half-year to June 2015 paints a bleak pic­ture. While SA’s ap­par­ent steel con­sump­tion in­creased by 6% in the latest six month re­port­ing pe­riod over the same pe­riod in 2014, all of this growth was sat­isf ied from im­ports, mostly Chi­nese. How­ever, most of this in­creased con­sump­tion ended up in in­ven­tory, as real con­sump­tion de­clined by 2%. In­ven­tory build-up in SA is reck­oned to be be­tween seven and 11 weeks for var­i­ous steel prod­ucts, forc­ing pro­duc­ers to drop prices in or­der to off­load ex­cess stock.

Chi­nese steel ex­ports to SA in­creased by 42% over the same pe­riod, and its share of the SA steel im­port mar­ket is now at 65%, up from 39% in 2013. Amsa has not made a profit in five years, while Evraz Highveld has not re­ported a profit from con­tin­u­ing oper­a­tions since 2010. Scaw Met­als, of which the IDC owns 74%, re­ported losses in each of the last three years.

Hannes van der Walt, CEO of Mac­steel, says this is the worst cri­sis fac­ing the steel in­dus­try in 30 years. “None of the ma­jor pro­duc­ers are mak­ing money in this en­vi­ron­ment,” he says. “We need steel mills if we want to con­tinue be­ing an in­dus­trial econ­omy, and un­for­tu­nately there is no quick fix for the in­dus­try. If gov­ern­ment de­cides to go with the in­crease in im­port tar­iffs, it will also have to of­fer pro­tec­tion for down­stream man­u­fac­tur­ing in­dus­tries. The prob­lem with tar­iffs is you have to be care­ful not to dis­tort in­ter­de­pen­dent mar­ket bal­ances and gov­ern­ment will be re­luc­tant to up­set re­la­tion­ships with China.”

Barend Petersen, chair­man of Evraz Highveld, now in busi­ness res­cue, says the in­dus­try sit­u­a­tion re­mains dire, though gov­ern­ment is fully aware of the sever­ity of the sit­u­a­tion and the im­pact it could have on jobs. “We need a struc­tural re­align­ment of the in­dus­try so that we can be­come glob­ally com­pet­i­tive. Any in­ter­ven­tion by the state at this point would pro­vide a tem­po­rary so­lu­tion. In the longer term we need a fresh look at the avail­able tech­nolo­gies and how to im­ple­ment them, and a greater sense of col­lab­o­ra­tion be­tween man­age­ment, labour and gov­ern­ment.”


Chi­nese ex­porters have been suc­cess­ful in cap­tur­ing a sub­stan­tial share of the lo­cal mar­ket by of­fer­ing 180 day pay­ment terms. Lo­cal cus­tomers are turn­ing to Chi­nese sup­pli­ers due to un­re­li­able lo­cal sup­ply and the bet­ter pay­ment terms, ac­cord­ing to Amsa.

New BEE leg­is­la­tion changes have also con­trib­uted to the swing to im­ported steel. Another fac­tor favour­ing im­ports is a tar­iff struc­ture in­creas­ingly out of step with other coun­tries. Tur­key, for ex­am­ple, im­poses tar­iffs of 30%-40% on pri­mary steel im­ports, while Brazil charges 12%25%, In­dia 8%-10%, China 3%-7% and Aus­tralia 5%. Most coun­tries levy tar­iffs of 10%-20% on wire prod­ucts.

SA im­poses no tar­iffs on pri­mary prod­ucts, and only lim­ited du­ties on cer­tain spe­cial­ity-fin­ished prod­ucts, such as nuts and bolts.

Gallo Im­ages/iS­tock

Paul O’Fla­herty

CEO of ArcelorMit­tal SA

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