Steel industry mulls drastic action to save the industry

Various players in the beleaguered steel industry came together for a round table discussion on 19 May 2021 to discuss the challenges being faced in the industry. Convened by Duferco MD, Ludovico Sanges, the round table laid bare the frustrations felt by the participants as their industry faces catastrophe thanks to uncompetitive practices by Arcelor Mittal South Africa (AMSA) and a government driven by ideology more than the pragmatism needed to restore this pivotal industry.

The facts are dire. Between 2007 and June 2019, the metals and engineering industry lost some
49 000 jobs, according to the Steel and Engineering Industries Federation of Southern Africa (SEIFSA).[1] In early 2020, ArcelorMittal South Africa closed its Saldanha Steelworks, the country’s most modern production facility, with a loss of a further 1 000 direct jobs and an estimated further 1 800 to 2 200 indirect ones.

Ironically, the woes of the local steel industry are currently exacerbated by a global steel shortage, which is driving up the prices that AMSA can charge. At the same time, though, all the participants said that AMSA has not been able to meet demand for some time, a problem it describes as temporary but, says Sanges, is long-standing. One cause is the shutting down of its more modern Saldanha Bay plant, another is the obsolete technology in use at its main Vanderbijlpark facility. At the same time, it is protected from cheaper imports by a swinging 18% tariff.

Rajen Surajlall, Sales Director at KK Shelving summed up the situation from the end-user’s perspective. “Unreliable supply of material, unacceptably long lead times, high prices and worsening quality from AMSA are putting huge pressures on cash flow and ‘breaking the chain of trust’ across the entire economy. We have no option but to import.”

Gerhard Papenfus, CEO of the National Employers Association of South Africa (NEASA), said that it beggared belief that a company that cannot supply the market and whose quality is low receives such comprehensive protection. To add insult to injury, thanks to high demand, its local monopoly and tariff protection, AMSA is currently recording record profits.

A key point of discussion was whether having a South African primary producer of steel is necessary. Viewpoints differed, but there was consensus that any primary producer had to be competitive. At present, there is no incentive for AMSA to be competitive; worse, given the fact that it also competes in the downstream market, it has a vested interest in choking competitors.

In addition, it was pointed out that AMSA is part of a global company and thus follows a global strategy – a globally competitive South African steel producer would actually compete against sister facilities.

Papenfus also raised concerns about the role that corruption could have played in the apparently disproportionate tariff protection afforded to AMSA.

Another related issue was the question of government’s proper role, particularly with regards to tariffs. Again, while there were some differences of opinion, it was widely agreed that government should restrict its role to regulating the industry and ensuring the necessary infrastructure – railways, energy, logistics – was in place.

“Tariffs are an outdated response, the market has changed,” argued Paolo Trinchero, CEO, South African Institute of Steel Construction. “We need a new response.”

One view was that given the high prices currently being paid for steel and AMSA’s high profits, this was an excellent time to reduce or eliminate AMSA’s tariff protection without jeopardising its survival.

Some have argued that tariffs successfully saved the local poultry industry but Supertec Ceiling’s Doron Friedmann argued that this was only because what was protected – chicken meat – was the downstream product, not the raw materials. “Protecting the primary producer just doesn’t make sense,” he said.

Theunis Duvenage, CEO of SS Profiling, argued strongly that scrapping all tariffs would be the best for the economy. “If customers and consumers pay less for goods, be it steel, chicken or cars, they have more disposable income and the benefits to the economy are much greater.”

Several participants highlighted the incongruity of a Ministry of Trade, Industry and Competition whose approach to the steel sector is the opposite of an open and free market philosophy.

Mike Benfield, CEO of Macsteel, made the strong point that it is the downstream industry rather than the primary producer that creates the most stable jobs. “What the downstream industry needs is freedom of choice when it comes to acquiring raw materials and a Minister who is prepared to look at the full picture and make decisions pragmatically in the best interests of the broader sector.”

Research by Oxford Economics[2] shows that for every $1 of value added within the steel industry, a further $2.50 of value is added by companies that supply services to the steel industry, not forgetting the value created by the companies that use steel. While figures for South Africa are not available, globally the steel industry is responsible for supporting 10.7% of GDP and 259 million jobs.

Any sensible tariff framework should focus on protecting the downstream industry, rather than the upstream.

It’s clear that the end game for the local steel industry is approaching. Unless the AMSA problem can be solved, and government be persuaded to adopt an industry-friendly approach, end users will have no option but to increase their reliance on imported product, and local beneficiators like Duferco and Safal will wind down, resulting in more job losses and a loss of industrial capacity that is unlikely ever to return.

KK Shelving’s Surajlall proposed a Steel Crisis Committee be formed to drive change, but NEASA’s Gerhard Papenfus argued strongly that a more decisive approach was necessary.

“I’m reluctant, but I think we need something like ‘rolling mass action’ to make government and AMSA sit up and take notice of what we are saying,” he said. “It’s particularly important to convince South Africans across all sectors and economic groups that they would be prejudiced by the demise of the local steel industry.”