Ailing metals and engineering sectors need government to stop shielding ArcelorMittal
While import duties help protect ArcelorMittal SA, they hit the competitiveness of the entire steel value chain
The metals & engineering (M&E) sectors are among the most important pillars of the SA economy yet are handicapped by an unfavourable policy environment and are unable to realise their economic growth and job creation objectives as set out in the National Development Plan (NDP).
According to the “State of Metals and Engineering Report” for 2020/2021, the sector contributed about R466bn to real gross value add, comprising about 15% of real GDP, and employed about 2.1-million workers (formal and informal) in 2018. By all accounts this is an important sector, essential to the government’s intentions of creating more jobs.
Disconcertingly, the sector has been in a state of decline over the past nine years, posing a threat to the fledgling black industrialist programme launched by the department of trade & industry in 2016 and requiring a multi-stakeholder — government, industry, development finance institutions and organised business — push to save the industry through a package of short- and medium-term incentives.
From 2007 to 2019, 50,000 jobs were lost, and this downward trajectory is expected to continue if no mitigating interventions are taken by policymakers and captains of industry.
Granted, the sector is susceptible to extreme volatility on the macroeconomic front, but equally it is worsened by protectionist government policies that shield the country’s only steel producer, ArcelorMittal SA (Amsa), with 20% import duties at the expense of downstream players, forcing manufacturers to pay crippling high prices for steel.
National Employers Association of SA CEO Gerhard Papenfus says that while the steel world selling price is $513 a tonne, Amsa’s cost price to make the steel is $632 a tonne and its selling price is $676 a tonne. “When the world steel price goes down, the SA downstream doesn’t benefit because we pay Amsa at their selling price.”
Consequently, thousands of jobs are being lost. Over a longer time frame — from 2007 to 2019 — 50,000 jobs were lost, and this downward trajectory is expected to continue if no mitigating interventions are taken by policymakers and captains of industry.
At a policy level, trade & industry minister Ibrahim Patel is making the right noises with the announcement of a steel master plan that reaffirms the government’s commitment to the sector. Also in the works are:
- The Industrial Development Corporation’s revised criteria for the R1.5bn downstream steel competitiveness fund to provide greater access and better interest rates for the sector;
- The R30m metals fabrication programme to establish new foundries and mills and;
- The new automotive master plan 2035, which would increase local content from 39% to 60%, providing substantial opportunities for the metals value chain.
While the above is commendable, the elephant in the M&E sector room is still the 20% import duties that protect Amsa from fair competition and halt the competitiveness of the entire steel value chain. Until Patel decisively deals with this, other interventions will be akin to playing with marbles while Rome is burning.
One of the objectives of the Industrial Policy Action Plan is to promote investment by the private sector in new industrial capabilities. It is our belief that instead of passively waiting for the economy to turn, we must proactively invest in the productive areas of the economy to boost aggregate demand. The M&E sector has a spillover effect to the rest of the economy, and its labour-intensive characteristics, requiring only rudimentary skills, is the right prescription for our sickly labour economy, reportedly sitting at 29.1% unemployment.
The recent GDP numbers from Stats SA showed that the economy shrank 1.4% in the fourth quarter of 2019, after a contraction of 0.8% in the third quarter, which means the economy was in recession for the last half of 2019. That is an added impetus for a call to action in a renewed effort to lay aside sectarianism and build a new united front to confront the evils of unemployment, inequality and poverty in our nation.
While we are waiting for the public policy machinery to turn, strict adherence to designation requirements for public procurement and increased local content provide us with quick win opportunities.
The slowdown in China in 2019 — and more recently the effects of the coronavirus — have dented demand for our exports, leaving us with the option to boost local demand. And the rest of the continent as an export destination is showing signs of growth with the uptick in preliminary continental steel exports to the rest of Africa in 2019.
However, this trend should be supported by increased production — including steel production of about 6.3-million tonnes — in the wider M&E sector, to grow continental steel exports further. The launch of the operational phase of the African Continental Free Trade Area agreement in July 2020 will provide further impetus and accelerate exports to the rest of the continent.
As the march towards a borderless Africa gathers momentum, the policy environment requires a major overhaul to facilitate the re-industrialisation of SA and surrounding regions and provide support to the M&E sector to be more competitive, agile and transformative to the continent’s economies.
• Magerman is Mergence Group MD.
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