DONALD MACKAY: Government and the steel industry’s century-old embrace

One hundred years ago the government of the Union of SA formulated its first industrial policies to help develop the then infant steel industry. This link between government support and SA’s primary steel industry has waxed and waned over the past century, but has never entirely disappeared.  

In 1923 at the annual meeting of the Union Steel Corporation, chair Maj Aubrey Butler noted: “Our government has proved sympathetic and far-seeing, introducing legislation for the protection and encouragement of the [steel] industry, in the form of a bounty [subsidy] system.”

To benefit from the subsidy your steel plant needed a capacity of at least 50,000 tonnes per annum, and none of the producers were of sufficient scale at that point to benefit from the subsidy. In 1924 a £300,000 debenture was floated in London for Union Steel to purchase the Newcastle Company and erect a steelworks at Vereeniging, thus creating the capacity and unlocking the subsidy. More followed, and in 1928 Iscor was established as a state-owned enterprise. The subsidies continued to flow until 1999.

In 1989 Iscor was privatised and listed, and in 2001 a controlling interest was bought by Lakshmi Mittal. Soon after arrival he flogged the iron ore mines, which became Kumba Iron Ore. But if you listened carefully you could hear a ticking sound from deep inside the Kumba deal. It was a time-bomb, and it exploded in 2009, 10 years after the disposal of Kumba.

When the iron ore mines were sold they carried a condition that the ore would be sold to ArcelorMittal SA (Amsa) at cost plus 3%. I oversimplify, but Amsa had an option to renew this agreement after 10 years and forgot to exercise that option. The price cap disappeared, resulting in enormous price increases from Kumba. Off to court. Lose. Appeal. Lose. Constitutional Court. Lose.

Back to 2001. Domestic steel prices rose as steel was priced at import parity, removing any internal advantage offered to the downstream industry. Such corpulent profits drew the ire of the downstream industry, which was not only paying elevated prices but also subsidising Amsa’s exports, which then came back as finished goods to compete with them. In 2004 they applied for, and succeeded in getting, the 5% import duties removed, but by 2008 Amsa’s profits had nearly doubled to R12bn.

Good fortune was not to hold. In December 2001 China joined the World Trade Organization (WTO) and began breathing fire into its steel industry. Swiftly, poor performing companies were weeded out by the Chinese government and subsidised finance and energy was provided to favoured businesses.

The effect was astonishing. China became the world’s largest steel producer by 2011 (45% of global volume) and by 2020 it was producing half of the world's steel, more than the next four countries combined. The subsidisation and consequent over-production of steel by China had become so problematic that the WTO set up a committee on [steel] safeguards in 2018, specifically to look at this.

The dragon was in full flight, consuming iron ore like a starving man at a banquet. Profits plunged as Amsa was squeezed between the jaws of cheap steel from China and surging iron ore prices. Enter then trade & industry minister Rob Davies, to the rescue, proposing an export duty on iron ore in 2014 as a way to drive down local iron ore prices. That went nowhere.

That same year Amsa approached the government to increase the import duties on steel, first on primary products such as hot-rolled coil, but soon moving to downstream products too. Whole portions of the steel value chain saw their duties rising. This, of course, benefited the primary producer, which was soon the only upstream producer of steel when the wheels came off Highveld Steel, which filed for business rescue in April 2015.

Then in 2017 there was a Lazarus-like moment when Amsa took it over and restarted production, with a R150m helping hand from the Industrial Development Corporation (IDC). This has always been a strange deal, because unlike when Highveld was running the plant Amsa was not making the steel on site. Instead, it had to truck the structural blooms from Newcastle, at significant cost. This plant competes directly with the mini-mill sector, which melts scrap steel and turns it into rebar and long steel products.

The mini mills are formidable competitors, bolstered as they are by aggressive government interventions upstream into the scrap metal industry, eventually forcing down scrap steel prices by 50% or more. The mini mills are now directly subsidised by the recycling sector, a bounty not enjoyed by Amsa. By 2022 the IDC had an exposure of R15bn to the mini-mill sector, three times larger than Amsa’s market capitalisation. Our exports of scrap steel plunged by 66% from 2012 to 2022.

The duties and market concentration pushed up steel prices again, much to the ire of the downstream sector and some politicians. “Four price increases in five months means Amsa is giving government the middle finger,” bellowed DA MP Dean Macpherson. The International Trade Administration Commission of SA remained intransigent and the duties remain.

In 2016, in a very South African fashion, a steel pricing committee was set up to “manage” steel prices, comprising government officials, Amsa and representatives of the downstream industry. This worked about as well as you would imagine.

On August 22 2016, the Competition Commission finally completed its 2008 investigation into cartel behaviour by Amsa, Cisco, Highveld, Scaw, Cape Gate and the SA Iron and Steel Institute, a case brought by Barnes Fencing Industries, and levied an administrative penalty of R1.5bn on Amsa, payable in five annual tranches of R300m per annum. Amsa also agreed to an earnings before interest and taxes margin of no more than 10% for five years, and capital expenditure of R4.64bn over the next five years. Both of these commitments remain problematic for Amsa. But it also has a protected monopoly, which is a problem for everyone else.

In 2018, 75% of Scaw Metals was bought from the IDC by a joint venture led by the same Barnes Group from the Competition Commission matter. As with most state-owned companies, the performance of Scaw remained moribund while in the loving embrace of government, but a combination of its partial privatisation and ever-more-hostile policies from the department of trade, industry & competition towards the scrap metal sector dramatically improved Scaw’s fortunes.

In 1923 Jan Smuts was prime minister of the Union of SA. World War 1 had ended just five years before and we were 16 years from Hitler’s invasion of Poland. Our population was 6.5-million, a tenth of what it is now. Yet a century later our steel industry looks remarkably similar. Apparently, some of the original Iscor machines are still operating, and of course the sector remains as dependent as ever on the intervention of government to keep the furnaces burning.

• MacKay is CEO of XA Global Trade Advisors.