Falling steel prices indicate big economic challenges ahead

Seifsa said that while steel users would benefit from the lower prices, they would also be impacted by the economic headwinds that would probably manifest in fewer sales of their finished products. File Photo

Seifsa said that while steel users would benefit from the lower prices, they would also be impacted by the economic headwinds that would probably manifest in fewer sales of their finished products. File Photo

Published Jan 27, 2023

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Steel prices have fallen fast in the past few months, indicating difficult global economic conditions ahead and lower margins for local producers that are struggling against a range of issues such as load shedding.

In response to Business Report questions about the implications of falling steel prices, the Steel and Engineering Industries Federation of SA (Seifsa) said that while it did not bode well for the sustainability of local producers, the low prices also indicated low consumption which was, in turn, a function of the global economy.

Factors intensifying global headwinds include a possible recession in the US, inflation which, while it had started levelling off, was stubbornly high, and tighter financing conditions.

“Domestically, the issues of the energy crisis, which has major implications for steel producers, only serves to compound the global headwinds,” Seifsa said.

The shares of South Africa's largest steel producer, ArcelorMittal SA, plunged more than 15% on Tuesday, after it flagged a crash in earnings due to pressure from lower prices, softer demand and coal and transport price hikes.

The group expects to report a 60% to 65% slide in headline earnings per share for the year to December 31, when it reports its annual results next month.

Seifsa told Business Report that steel prices rose considerably during the first half of 2022, and then started to decline in the second half. The full year averages were made up of the net movement.

At the producer level, across 10 of the most-consumed products, steel price inflation averaged 2.45% (year-on-year) in the six months from June to December 2022.

In the past quarter, from October to December, steel prices declined at a rate of -3.36%.

At merchant level, across 20 of the most-consumed products, steel prices declined at an average rate of -4.5% from July to December 2022.

Seifsa said that while steel users would benefit from the lower prices, they would also be impacted by the economic headwinds that would probably manifest in fewer sales of their finished products.

South Africa’s steel industry has been under pressure for years as a result of prolonged economic decline. Even before the Covid-19 pandemic, low domestic demand, driven in large part by falling infrastructure spending, a depressed global market and cheaper imports, had negatively impacted the local steel sector, leading to many job losses in the sector.

The local African metals and engineering sector, according to previous reports, is estimated to have lost around 49 000 jobs between 2007 and the second quarter of 2019, of which 38 000 were in the metals sector.

Since 2015, around 1 000 companies were liquidated and more than 300 companies put into business rescue when import duties were imposed. This was exacerbated by the Covid-19 pandemic.

In 2021, a steel industry master plan was signed. It aims to revitalise South Africa’s struggling downstream steel industry. While some have welcomed the master plan, others have argued that the plan prevented the industry from accessing cost-effective input materials which, in turn, made it uncompetitive.

Seifsa said yesterday that the lack of a dedicated and continuous infrastructure programme, energy availability, deteriorating logistics and poor local government service delivery had all contributed to structural decline of the sector, which had declined at a compound annual contraction rate of -1.6% between 2008 and 2022.

“The sector has been in a structural recession over this period,” Seifsa said.

Greg Talbot, the managing director of Brits modular farming solutions company Tal-Tec, said recently: ”A number of years ago, ArcelorMittal negotiated to have 18% import tariffs and duties put onto imported steel, to protect its local business. Yet it is still able to charge the global market price for locally produced steel – prices that shouldn’t be affected by global shipping issues. So, South African manufacturers are getting the raw end of the deal, in spite of the fact that local manufacturing is a national priority.”

BUSINESS REPORT