By Kobus Verster
As we enter another election season, there is much discussion around “saving” the local steel industry. This is well-intentioned and implicitly recognises the strategic importance of the sector to the industrial footprint and the broader South African economy. “Saving it”, however, is a misguided narrative, and one that needs addressing.
“Saving” the steel industry suggests somehow propping it up, ultimately, at the taxpayers’ expense. This is neither desirable nor sustainable and frankly, it’s not fair. The South African steel industry rather, needs a level playing field through the establishment of a conducive operating environment and a levelled eco-system to allow it not only to survive, but to flourish.
To place the local steel industry in global context, in 2023, the world steel industry produced 1888.2 million metric tons (Mt) of crude steel. The top 10 steel producing countries in 2023, were China (1019.1 million MT, approximately 54%), India (140.2 million MT), Japan, the US, Russia, South Korea, Germany, Türkiye, Brazil and Iran.
South African crude steel production in 2023 represented approximately 0.3% of global production. South Africa has about 10-12 million tons of steelmaking capacity, but utilising only approximately 50%, in the absence of local demand and lack of a level playing field to compete internationally.
However, notwithstanding the need for a functioning eco system and level playing field, today the local steel industry is confronted by a perfect storm of severe magnitude on at least four fronts.
Steel dumping:
Over recent years, dumping of steel and steel products in the international market became commonplace and the ability of South Africa to enforce import duties was eroded by corruption, poor systems, and incompetence.
Even though import duties and penalties are a baseline and legitimate tool used internationally to level the playing field for steel, in South Africa we have not made optimal use of these tools, nor have we enforced the implementation of those we have.
Decline in manufacturing and construction
Simultaneously, two of the most important domestic sectors for steel are in decline, affecting demand. Since 2015, the manufacturing and construction sectors in South Africa have not grown in real terms. As a proportion of gross domestic product (GDP), manufacturing has dropped from 24% in 2010 to 12% in 2022.
Many of the infrastructure projects announced by the government have not yet commenced. Total investment in infrastructure is well below the National Development Plan (NDP) target of 30% – and has been declining since 2015. To reach the NDP target, public‐sector investment would need to grow from 3.9% of GDP in 2020 to 10% of GDP by 2030, while private‐sector investment in infrastructure would need to grow from 9.8% of GDP in 2020 to 20% in 2030.
Logistics
Even though Transnet has announced over R100 billion investment over seven years to improve infrastructure and efficiencies, many of the anticipated benefits have not yet filtered through the system and negatively impact the steel industry. There was a 25% reduction in available locomotive fleet in 2021/22 as compared to 2017/18; there was significantly decreased loco reliability due to non-availability of locomotive spares; systemic underinvestment resulting in increased maintenance backlog due to limited funds and an increase in derailments. Further impacting the steel industry, increases in port and freight rail tariffs are above inflation and have been for some years.
Power cuts
Eskom’s portfolio of crises is well-documented, but power cuts have a particularly severe and costly impact on steel blast furnaces. It’s not just catastrophic electricity cuts that are hurting the steel industry, the level of price increases in Eskom prices awarded by the National Energy Regulator of South Africa (Nersa) over the last years has been exponential in real terms.
From 2007 to 2022, Eskom increases were 653% against an inflation rate of 129% over the same period. Electricity price tariffs increased four-fold in real money terms in 14 years. Eskom has already applied to Nersa for a further 32% tariff increase.
Scrap metal policy
Then there is the thorny issue of scrap metal policy. The temporary banning of the export of scrap metal was initiated in November 2022 to attempt to control theft and vandalism. The Preferential Procurement of Scrap (PPS) system has been in place since 2014 to provide South African foundries and electric mini mills with better access to higher quality and discounted scrap metals in the local market. Yet, the scrap export tax since 2020 and more recently the export ban has resulted in market distortions which outweigh any possible benefit to the economy.
So, what is to be done? At the policy level, the most important current initiative is the 2021 Master Plan for the steel and fabrication industries sector. The key focus is on continuous improvement and collaboration between industry, government and organised labour to maintain the sustainability of the steel and metal fabrication industry.
Seventy-three implementation actions guide the implementation plan, focusing on six key areas: supply-side; demand-side; export markets; resource mobilisation; transformation; and human capital development. The plan is based on identified competitiveness improvements in the firms, measures to reduce levels of imports and repositioning of the industry to be resilient under conditions of intense global pressures.
Yet, despite its laudable intentions, some of the assumptions informing the plan have proved erroneous, for example, a reliance on infrastructure spend, which has not materialised.
No comprehensive action has been taken to halt cheap imports and limited industrial finance has been made available other than for mini mills. A key element of the plan is localisation, which has not been implemented to any significant degree outside the automotive industry.
Another imperative is the development of a green steel industry. But to achieve this will require significant capital investment, implementation of new technology and the development of one’s own energy supply.
South Africa produces world-class steel of the highest quality using abundantly available iron ore, and this steel is a key component of our manufacturing, mining, construction, automotive, agriculture and indeed renewable energy sectors. It is also vital to our country retaining its industrial footprint. But to survive and flourish a conducive economic, infrastructure and policy ecosystem is urgently required and for this, we need the government to deliver on its own mandate.
Kobus Verster is the CEO of ArcelorMittal South Africa.
BUSINESS REPORT