The great global economic recession, which was triggered in 2008 by a financial crisis arising from reckless lending by financial institutions in the US, has had devastating and multiple impacts on the global economy.
No less for the South African economy, which has been impacted by a series of exogenous economic “shocks”.
Taken together with a range of domestic shocks – especially electricity supply constraints and prices – these external factors have had very serious negative consequences for economic growth, industrial development and job creation. These exogenous shocks include a sharp decline in demand for exports in South Africa’s traditional trading partners and more recently, an end to the commodity supercycle.
The latter has led to a significant decline in demand and prices for commodities, which has and will in the near future negatively impact the domestic mining sector with considerable knock-on effects for the domestic economy. The latest “wave” in a series of negative shocks arises directly from the global recession and impacts directly on the domestic steel industry. Some of the facts that provide a context to this crisis are as follows.
The global steel market has been dominated over the last decade by China, which has capacity to produce 1.1 billion tons of steel. The country’s steel exports account for well over half of the global steel market – presently estimated as 800 million tons. However, the global recession and depressed demand has recently led to a glut of steel in the global market.
In these circumstances and on the back of low production costs, highly competitive Chinese steel exports have penetrated a large number of export markets in developed and developing countries alike, including the South African steel market.
The South African steel industry is a key strategic industry, directly representing 1.5 percent of the country’s gross domestic product (GDP) and indirectly supporting strategic sectors of the economy, the top five of which, it is estimated, support 15 percent of GDP and employ 8 million people.
Steel adds R26 billion to the economic value of South Africa’s iron ore and if this capacity was lost it would add 1 percent of GDP to South Africa’s trade deficit.
The domestic steel industry is the only one in sub-Saharan Africa; there is a positive correlation between GDP and steel production for developing countries around the world and the loss of our domestic steel production capacity would constitute a grave threat to the growth drivers set out in the National Development Plan, the Industrial Policy Action Plan and to President Jacob Zuma’s nine-point plan for economic growth.
It is estimated that the landed price of imported steel is currently 12 percent below the cost of production averaged across a range of steel products in South Africa, seriously undercutting the competitiveness of South African producers and constituting a direct threat to the domestic steel production sector. But global overproduction; depressed demand and import penetration are only one side of the story.
In 2003, to summarise a far more complex process, the democratic government sold off its remaining equity in the former Iscor to global steel producer Arcelor-Mittal, save for 7.9 percent held by the Industrial Development Corporation (IDC). Arcelor-Mittal South Africa accounts for 75 percent of domestic steel production.
Notwithstanding a highly advantageous cost plus 3 percent price for iron ore, and in the face of every effort on the part of the government to arrive at a collaborative, mutually beneficial relationship aimed at securing a steel price in the lowest global quartile of steel prices, Arcelor-Mittal South Africa followed a policy of import parity pricing for its locally produced steel. In so doing, it extracted, what many independent analysts regard as excessive returns, repatriated from South Africa.
A lack of maintenance, capital equipment investment and upgrades to ageing plants contributed to seven catastrophic plant breakdowns at various of its plants across the country. All these and other factors, taken together with the addition of significant premiums by intermediate steel distributors, contributed to a lack of competitiveness of domestic steel production capacity and uncompetitive steel prices for downstream, labour intensive, domestic manufacturers and users of steel products such as those involved in construction and infrastructure.
Under these circumstances, to increase competition in the steel market and to lower prices for downstream manufacturer’s, the government successfully intervened to support a lowering of tariff protection for steel – an intervention which did in fact bring down the aggregate domestic price of steel by 5 percent. In addition, it is a matter of record that the government continued to do everything in its power to arrive at a more collaborative approach, which would accommodate both a reasonable return on investment for steel producers and serve the national interest.
Of course South Africa is not the only country that has been affected and neither is it alone in its efforts to manage the problem. A large number of countries have imposed or are in the process of imposing import tariff and anti-dumping measures to protect their domestic steel production capabilities.
These include the US, countries in the EU and a range of developing countries, some of whom are Brics countries. In this complex environment, in which vested interests most often have to be separated from the national interest, how has and how will the South African government respond?
Firstly, certain processes before the Competition Commission must of necessity remain confidential to protect the legal integrity and independence of the outcomes, which may flow therefrom. This is true also of the numerous applications before the International Trade Administration Commission (Itac) – the independent body responsible for trade measures – tariffs and anti-dumping specifically.
That said, the South African government has and will step up all its efforts to secure and grow the strategic steel sector in South Africa. These measures will include, in principal, support for the tariff and anti-dumping applications filed by steel producers with Itac; conditional upon reaching agreement with such producers that tariff protection does not lead to inflated increases in steel prices, which could be highly deleterious to downstream users. In short, a solution which leads simply to “passing the problem on” to users will be no solution at all and a reciprocal package of measures, which takes into consideration all critical factors, including the vulnerability and needs of the other smaller steel mills is required.
Such an agreement, which is both fully compliant with the prescripts of the law and secures binding commitments to other government concerns such as maintenance and investment, is not only possible but is in reach. Other government support measures include the possible designation of steel for local production to raise aggregate domestic demand and stronger measures to limit the unencumbered export of scrap metal which both increases the carbon intensity of the economy and is associated with the theft of metal products from vital economic infrastructure and the illegal export of precious metals from South Africa.
The government and its agencies such as the IDC are also involved in a range of interventions to address the concrete challenges faced by individual steel producers. In the case of Evraz Highveld Steel for example, this includes a R150 million funding facility made available by the IDC and processes through business rescue to identify viable new technology and equity partners for the company.
Finally, the government is involved in a rigorous process to consult with and engage with all stakeholders – steel producers, traders and suppliers, downstream users of steel and labour – in a collaborative effort to seek concrete practical solutions to secure South Africa’s strategic steel production capabilities. It is imperative that such an approach secures agreement and a set of interventions to weather the existing storm and place the steel sector and the economy as a whole in the best possible position to optimise the enormous opportunities that are evident when the market conditions improve.
If there is one lesson to emerge from this complex process it is this: working together in a collaborative, mutually beneficial relationship will always bring better and even optimal results, which marry the needs and economic realities of the private sector with the country’s interests – economic growth, re-industrialisation and the retention and creation of jobs.
* Rob Davies is the Minister of Trade and Industry. This article first appeared in ANCToday
** The views expressed here are not necessarily those of Independent Media.