The overriding story of the South African economy is one of a country that is not reaching, let alone fulfilling, its potential in many areas – the country’s current economic growth, job creation prospects and industrial development efforts are lacklustre.
I will focus here on our area of business – steelmaking – about which there has been much debate on these pages recently. Let us put differences aside for a minute and focus on the hard facts.
The key – as always – for the sake of national and local economic growth and industrial development, which will result in job creation, is to find the sweet spot where the actions of the private sector, labour and the government optimally collide to create a virtuous growth cycle.
First, some context. The South African steel industry is under severe threat – yet we believe its future existence and sustainability is essential to underpin the country’s economic development goals and support the growth of numerous key sectors. Steelmaking contributes more than 1.1 percent directly to South Africa’s gross domestic product (GDP), and a further 0.4 percent indirectly.
The steel industry plays a critical role in mineral beneficiation, given South Africa’s abundant iron ore reserves: steel quadruples the economic value of South Africa’s iron ore, currently adding more than R26 billion in value. Furthermore, steel is a key enabler of every part of the economy – including the automotive, mining, construction, energy, and infrastructure sectors. (All of which have been identified as major growth drivers by the government’s own National Development Plan).
The top five steel consuming industries together contribute some R600bn to South Africa’s GDP (15 percent of the total) and employ more than 8 million people.
Number one customer
More specifically, ArcelorMittal South Africa (Amsa) is Kumba’s number one customer, Transnet Freight Rail’s number one customer, Sasol Gas’ number one customer, Exxaro’s number two customer and one of Eskom’s top five customers – the footprint and dependencies are significant.
And as Minister Rob Davies correctly pointed out (Steel industry strategic for SA’s growth, Business Report, August 31), the local steel industry was a core employer in South Africa’s key industrial ecosystems: Vanderbijlpark (Gauteng), Saldanha (Western Cape) and Newcastle (KwaZulu-Natal). Two thirds of the households in Vanderbijlpark and Newcastle and one quarter of those in Saldanha are dependent on the local steel industry for their livelihood.
Irvin Jim, the secretary general of National Union of Metalworkers of SA (Numsa) also correctly points out (Struggle for memory also a struggle for power, Business Report, September 14), that any closures of steel plants in the short term would be a catastrophic blow to the future of the manufacturing industry in South Africa. Some detractors, particularly in the downstream industry, have attacked the case for a primary steel producer in South Africa, asking: Why does a domestic steel industry matter? Why not rely on imports? Why, indeed. Let’s spell it out.
First, there is a positive correlation between GDP and steel intensity for developing countries. South African steel demand is likely to increase with the growth in the economy; local steel demand is forecast to recover from the current slump and attain a 2 percent annual growth rate, with demand forecast to increase to 5.8 million tons per annum by 2020 and more than 7 million tons per annum by 2030.
Second, South Africa’s distance from the nearest steelmaking nations increases the risk of security of supply and poses challenges for importing, due to long lead times and transport costs. A domestic steel industry lessens these risks and offers protection against raw material market volatility, which has been higher than that of the steel price in recent years.
And third, South Africa as a country has sub-Saharan Africa’s only primary steelmaking capability – one of only 65 countries in the world that has primary steelmaking capacity with roots dating back to 1912. This represents a remarkable opportunity for South Africa to supply steel and beneficiated steel products to neighbouring economies, many of which are growing more than 5 percent a year.
The industry also supports key innovative sectors of the economy, such as renewable energy. For example, the industry is able to offer tailored products to meet specific requirements for wind towers and solar installations. As a result, wind towers are now locally constructed, and South African technology has been developed, which has led to a 16 percent saving on solar installations. In addition, Amsa alone spent R1.8bn in 2014 to reline its Newcastle blast furnace to ensure plant and job sustainability for the next 25 years.
But the local steel industry is seriously threatened by imports. This threat is driven by the current global overcapacity of the steel industry – amounting to some 300 million ton per annum – largely driven by China, which produces 50 percent of world steel and has the capacity to increase further. In addition, through a variety of well documented, well understood schemes, rebates, subsidies and hand-outs, the Chinese government directly supports its steel industry – meaning that its producers can sell steel to the world at less than their own cost of production.
Global experience indicates that import duty is the most efficient short-term measure, and anti-dumping is the most effective longer-term measure, but takes a year if not years to implement. The South African steel industry, however, does not have the luxury of nine months, nevermind years. Without exception, every one of the countries which have a primary steel sector has moved to protect their local industries and jobs from what is blatantly unfair Chinese-government-subsidised competition.
The industry has suffered significant losses over the last five years, and this is expected to continue under the current pricing regime – and these losses are, quite frankly, unsustainable for any local producer under the current conditions.
We acknowledge and appreciate the steps that the government has already taken, including the approval on import duties for two of our products and its in-principle support for the tariff and anti-dumping applications filed by local steel producers. But while many good steps have been taken, on paper, an even greater sense of urgency is required.
In seeking urgent import protection in a domestic market that is flat or even negative, we are acutely mindful of the interests of our customers, of the thousands of big and small downstream steel and engineering businesses that use our products to produce structural steel, wire products, packaging and even cars. We believe that their best interests – and their jobs – are as much at stake as ours.
As ArcelorMittal SA, the dominant local steel producer, we have also publicly acknowledged our role in some of the negative legacy issues that have been created in the industry, and we intend fixing them in a responsible manner. One being the issue of pricing in the open market; we have now agreed to relook at pricing and move away from the import parity pricing model. We support the key proposed mechanism for support to the South African steel industry, which is a “fair price”. This would allow the steel industry to operate profitably and at the same time would incentivise greater efficiency.
Pricing support
Additionally, the industry must play its part in stimulating the economy, generating exports and creating employment via offering pricing support and additional capacity investments to support certain key sectors – for example the structural steel, wire products and automotive sectors. We have estimated that this could generate up to 40 000 additional jobs and R10bn in revenue for South African companies.
The South African steel industry should also contribute to growth and employment creation in priority economic sub-sectors. Amsa has already given some R3bn in rebates to domestic customers over the past 10 years, as part of its commitment to South Africa. Some 70 percent of this contribution has been through value-added export rebates – that is, a rebate offered to steel buyers who increase its value by at least 20 percent and then export the product. The remaining contribution has been through discretionary, strategic rebates.
Finally, South African steel must transform in line with national goals. South African steelmakers must start to bring in significant black players who can add value by contributing capital, developing new markets and helping to build skills required for future competitiveness. We commit to lead this charge. However, the industry also cannot afford any further strikes as was the case last year with the crippling metal industry strikes and labour needs to play its part in ensuring stability and productivity improvement in the industry.
Now is the time for the government and industry decision makers, including labour to act together, taking urgent, effective and equitable measures to ensure that South Africa maintains, strengthens and grows its domestic steel industry, which will sustain and increase the number of sorely required jobs.
* Paul O’Flaherty is the chief executive of ArcelorMittal South Africa.
** The views expressed here are not necessarily those of Independent Media.
BUSINESS REPORT