South African steel industry is embracing mini mills

Whether it is sheet, tube, coil, plate, rod or bar, all these products need steel to be processed, shaped, bent, formed or cut before a company can even think of being a processor, manufacturer or merchant and it needs a regular supply. Typically the machines used in this type of processing are hungry and need to run for long periods to make them productive and cost-effective.

From steel processing to steel making
Steel is the backbone of industry, and it follows suit as the backbone of infrastructure. Steel provides the strength to keep a building and its components standing from the ground up. Steel can be used in diverse arrays of applications, both domestic and industrial. The strength to weight ratio assists in cost savings and ensures that the structure will stand the test of time. Steel, dependent on the design and customer’s requirement, can be shaped to fit any mould. The versatility, design, and application can make a structural art piece that is appealing to the eye.

It therefore goes without saying that countries that suffer a steel shortage will be left vulnerable. The same can be said for companies that have steel as a requirement. And those are many in the value chain.

South Africa is one of the largest steel producers on the African continent. According to the World Steel Association, South African steel manufacturers produced 5.7 million metric tons of crude steel in 2019, second only to Egypt on the continent. But weren’t we the number one on the continent not so long ago? In 2004 production was 9.4 million tons per annum but this had dropped to 6.3 million tons per annum in 2018.

The fact that the steel industry has been in decline is in no doubt. There are many reasons why but one of the chief protagonists, according to many in the industry, is the indifference of the only local producer and supplier. This has led to an influx of steel imports which has adversely affected the profitability and capacity utilisation rates of the domestic steel producer, says government. They have reacted unfairly say many downstream users, by imposing duties on imported material.

This has led to an alternative steel mill culture which, oddly enough, is being funded and encouraged by another government agency – the Industrial Development Corporation (IDC). I say oddly because on the one hand the government is trying to protect the local producer but on the other hand it is creating competition for the local producer. In 2015 there was a big fanfare of how the IDC was working with Chinese investors on a new five million ton per annum steel mill, which was to focus on the local and regional export markets. This has not materialised.

Unreliability of supply
However, if you look deeper, it is clear that local downstream users are fed up with the unreliability of supply and the vulnerability that they have to endure with no control on price increases.

Reports indicate that the South African steel industry is embracing an alternative steel mill technology as an alternate to expensive traditional integrated steel plants. Globally, about three-quarters of all steel is produced via the blast furnace or basic oxygen furnace (BF/BOF), according to the World Steel Association.

However, locally steel producers are looking to invest in localisation and smaller plants to stay competitive in today’s fluctuating steel industry.

The steel industry is demanding solutions that directly boost efficiency at a reasonable cost, and in short return on investment periods. These mills, typically used for the production of long products, are ideally suited to steel industries in developing countries because they are less energy intensive and require a much smaller upstart capital investment, compared with that of traditional integrated steel plants. These mills are also more suitable for developing countries where supplies of coking coal are limited.

The typical feedstock for these steel mills is usually scrap metal or a combination of scrap metal and direct reduced iron (DRI), also known as sponge iron. The expenses associated with DRI and scrap-based steel plants are typically lower than those of large integrated steel plants, which manufacture steel from iron-ore.

Further, these steel mills provide producers with the liberty of manufacturer mobility. The feedstock for these alternative steel mills is significantly lighter and easier to transport, which frees producers from the burden of having to be situated near the source of the raw material.

These mills are small enough to be situated near demand hubs, and producers who use them often supply a regional client base, thus significantly cutting down on final product transportation costs. These plants can also produce high-quality product profitably at lower yearly production volumes, resulting in increased profitability during an economic downswing.

In recent years we have seen SA Steel Mills, Cisco, United Heavy Industries, Fortune Steel Agni, SA Steelworks, Unica Iron and Steel and Veer Steel established.

According to the South African Steel and Metal Fabrication Master Plan 1.0 devised by the Department of Trade, Industry and Competition, South Africa had the capacity to manufacture 12 million metric tons of carbon steel per annum. This has now been reduced to 10 million tons, of which about 80-85% is effective and this is about 8.8 million tons. Domestic steel consumption is estimated to be about 3.5 million tons currently. The implied excess is above 5 million tons. AMSA’s Saldanha plant is in care and maintenance, but most of the capacity is available. Cisco has 450 000 tons of steelmaking capacity available, but is not in full production. AMSA Newcastle has 1.7 million tons capacity and is only operating around 1 million tons. Highveld used to make about 1 million tons. It went into business rescue and its operations ceased. It has however recovered some production, but not yet at its previous level.

Estimated mini-mill current capacity (long products) is about 200 000 tons. There are some variations in the numbers depending on where they are sourced.

Flat carbon steel capacity is 4.7 million tons, consumption in 2019 excluding imports was 2.1 million tons, so surplus capacity is about 2.6 million tons. Exports in 2019 of flat carbon steel were 594 000 tons, of which Saldanha produced 400 000 tons. The industry is exporting under a million tons per year in total.

There are potential investments by at least three South Africa-based producers other than AMSA in the production of flat steel products, but their total tonnage (probably over 1 million tons p.a.) will not change the predominance of AMSA Vanderbijlpark. There are high barriers to entry by new entrants. The re-opening of the Saldanha plant would make a difference.

Supply is not matched to demand. For instance, South Africa has discontinued or has never made many of the steels required for the auto, mining equipment and yellow metal industries. About 50% of the 750 000 tons per year of steel imported are flat steel products not manufactured in South Africa. Some were made here, but production has stopped for various reasons. Intervention is needed in order to match supply with demand – the primary steelmakers must be able to guarantee security and sustainability of supply and must match supply to the demand for the right kinds of steel at fair prices.

The remaining 50% of imports are made up mainly of hot rolled coil and galvanised steel from China and Russia. Russian steel is not covered by safeguards, but imports currently exceed the 3% threshold, which implies they should be considered for inclusion under the safeguard.

The excess capacity in South Africa in long steel products is in commodity long steel products. Long steel capacity, excluding the new capacity not yet commissioned, is 4.1 million tons; consumption in 2019 excluding imports was 1.9 million tons; surplus capacity is therefore about 2.2 million tons. The price of long steel is lower than the import price and is not sustainable.

An immediate area where policy has to be carefully navigated is between the advantages of primary steel production using ore and mini-mills using scrap metal as an input for the production of certain products. During the course of industry consultations, it has become apparent there are different views on the right mix between the two, and the impact that the newer steel mini-mills have on the sustainability of integrated steel production facilities.

However, it is recognised that mini-mills contribute to economic inclusion by allowing access to the market by SMEs and black industrialists, and equally important, these mini steel mills enhance competition in particular regions or products.