PHILIPPA RODSETH: Now is an opportunity to stimulate demand side of economy

The announcement by ArcelorMittal SA (Amsa) that its long steel business would remain open has been greeted by a great sigh of relief by most of the steel value chain and large segments of SA’s manufacturing sector.

At the Manufacturing Circle and more than a dozen industry associations, we believe the Amsa decision has given us a window of opportunity to re-energise local manufacturing. But only if all parties — industry, government and labour — grasp this opportunity with both hands.

Earlier in July, Business Day quoted Amsa as saying that deciding to not mothball its longs business would save “as many as 80,000 jobs in the value chain” (“Steel jobs crisis averted as ArcelorMittal SA keeps plants open,” July 2). We believe the real effect would be well in excess of that number, particularly in the downstream elements of the steel value chain.

In January, a “crisis summit” was held ahead of Amsa’s anticipated longs-mothballing announcement. That event, arranged by the International Steel Fabricators of Southern Africa (ISF), was attended by more than 20 concerned industry associations, including the Manufacturing Circle.

It heard that as much as 35% — 400,000 to 450,000 tonnes — of the formal downstream’s long steel requirements could only be produced by the Amsa mills, principally its Newcastle plant. This includes the steels required by sectors such as automotive, construction, mining, electro-technical, rail and electricity transmission.

Simply stated, without the long steel coming out of Amsa, large segments of the SA steel downstream would be at risk, as would be many of the 270,000 direct jobs reliant on it.

Newcastle remaining open presents a huge opportunity for all with an interest in the health and prosperity of steel and manufacturing in this country. How, then, do we exploit this opportunity?

Fundamentally, we need a common understanding that our country’s current consumption is about 50% of total installed production capacity. We need to increase the utilisation of our manufacturing capacity by filling our factories with orders and, most significantly, with skilled employees.

There are a number of national mega-investment requirements that our factories are desperate to play a part in fulfilling. These include Eskom’s transmission infrastructure upgrade, the building and rebuilding of railway lines and additional rolling stock, and the expansion of ports. These are all opportunities that require SA Inc — government, business and labour — to apply a strategic procurement approach.

Such an approach involves state procurers negotiating with potential industry suppliers to obtain the best result for both procurement and the country. SA’s current tick-box administrative approach to supply chain management (as a part of financial management rather than of strategic procurement) has had the unintended consequence of excluding this possibility.

We also have the capability to develop and apply rules and standards (the SA Bureau of Standards is an example) making it possible to simultaneously optimise the design, performance and lifetime costs of a project, while also providing opportunities for local industries.

There are ways to structure contracts to enable a long-term horizon and smooth order flow, which are essential for domestic industry to invest and develop expertise and capacity. For example, the procurement of large quantities of material at bulk discounts, and then making these quantities available to contractors, could solve several problems — reducing cost and the complexity of acquisition, and providing a steady, smooth flow of orders to industry over a longer time, rather than sporadic, “lumpy” orders.

The current “feast or famine” procurement situation means SA manufacturers are starved of orders and demand for long periods, during which they lose expertise and skills and do not invest, modernise or innovate. They are then hit with tenders for large quantities, which they are not able to mobilise over the short term and so lose the tenders to large international suppliers. There are several examples of the disadvantages of this approach, where the international contractor establishes a local plant to supply, but then closes and leaves at the end of the project. After-sales service has also been a problem at times. 

The multiplier concept of delivering a project by way of local supply also needs to be stressed. The benefit to the fiscus taking into account local taxes paid during the manufacturing process, including employee, company and value-added taxes, must be acknowledged. When assessing a project delivered by way of imported means, cost comparisons are seldom assessed on an “apples for apples” basis. We need to focus on dramatically increasing our volumes while remaining cost competitive. This can be achieved if our factories’ fixed costs are absorbed over greater levels of volume, which, in turn, will allow us to be competitive in export markets.

Should we get this right, we will have a reinvigorated, capacitated steel value chain that is able to compete internationally, in export markets, with the best in the world. SA Inc then needs a similarly co-ordinated export strategy, one that includes government, manufacturers and the funders of projects including our development finance institutions and commercial banks.

With the survival of Newcastle and the rest of Amsa’s longs business we have a vital window of opportunity. Unfortunately, we don’t know how long that window will remain open, but it is hoped that incoming trade, industry & competition minister Parks Tau will be alive to this opportunity to stimulate the demand side of our economy.

To resort to cliché, we must strike now while the manufacturing iron is hot.

• Rodseth is executive director of the Manufacturing Circle, the voice of SA manufacturing.