Local industry’s future in China’s hands
THE Department of Trade and Industry’s “hardball” treatment of dominant steel producer ArcelorMittal South Africa has had the desired result of greater openness and a more level playing field, but the sustainability of the local steel industry still depends on China.
Steel and Engineering Industries Federation of Southern Africa chief economist Henk Langenhoven said: “There has been some improvement in the prices of iron ore since the end of last year, and from what I can deduce there is some stockpiling taking place in China and South Africa. Steel inventories have been low.”
He said a brief rise in steel prices had seen China reopen some of its production capacity, and it was hard to tell whether China’s capacity dictated prices or the other way around.
Either way, China’s ability to swamp global markets with cheaply produced steel looks set to continue for as long as it takes to shift its economy towards consumer-led buying instead of infrastructure development.
“It is near impossible for commodity prices to recover to the levels they were at during the boom period. China has overcapacity in almost every component of its manufacturing sector. The underlying demand will not be repeated with the same impetus.
Despite the continuing cycle of global steel producers overshooting and then undershooting, Langenhoven said the low part of the cycle was set to last perhaps for a decade this time, and that steel producers needed to make a structural adjustment to match reduced demand.
“There will be a number of casualties still. If you talk about metals and engineering as a much wider sector than the ferrous component, there is still a lot of bleeding. The latest employment figures show that if you work with an average-size company of 50 employees, about 500 companies bit the dust in the last two years. The biggest one was [Evraz] Highveld, but there is a lot of fallout downstream still to come.”
Langenhoven said investment should focus not on expansion of capacity but on modernisation and better technology, so that costs come down. “Don’t put up another steel mill.”
Langenhoven said that in a global trend to protectionism, it was difficult to predict just how far governments would go.
“Also, the idea of a developmental price produced by lowering the cost from primary producers is a fallacy. Each subsector has its own dynamics and lower primary steel prices don’t automatically benefit downstream players.”
He said the work of the International Trade Administration Commission should be commended, but protecting smaller players — which needed sophisticated protection in line with the products they produced downstream — could be difficult in a complex and competitive private sector environment.
On the upside, steel producers like ArcelorMittal are looking to open up new markets locally in the same way as aluminium producers, which are looking to sell more products to the local automotive industry.