SA’S STEEL INDUSTRY DOWN AND OUT?
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
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
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.
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.”
HOW OTHER COUNTRIES PROTECT THEIR STEEL PRODUCERS
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.
CEO of ArcelorMittal SA