KEVIN TUTANI: How to fix steel industry after master plan failure

SA is Africa’s second-largest steel producer after Egypt, which doubled its production in the past decade, whereas SA has lost about 30% of its output in the past two decades.

Globally, East Asian nations, particularly China, have grown their capacities and continue to outcompete SA’s steel in terms of price. By 2019 about 750,000 tonnes of steel was imported into SA, even though the country has excess production capacity.

In that year local steel production was about 4-million tonnes, against an effective production capacity of 8.8-million tonnes, according to the steel & metal fabrication master plan of 2021. By 2023 the country was still producing less than 5-million tonnes annually. 

SA’s steel industry is fragmented, with large producers unable to collaborate effectively as this contravenes the principles and regulations of the Competition Commission. Co-ordinated research & development (innovation) and shared production runs have been impossible, despite the existential crisis facing the industry.

While large firms have been struggling, small steel producers have enjoyed several advantages, especially the ability to buy local scrap metal at a 20%-40% discount on the international price, for recycling into semi or finished steel products.

The price advantage came about through the price preference system of 2013, which meant owners of scrap were in effect subsidising small producers, which benefited from a cost-of-production advantage over large producers.

The unreliability of electricity, rail and port services has also been damaging, particularly to large producers because their plants are costly to operate when being switched on and off intermittently. 

The government’s Public Preferential Procurement Framework meant central, provincial and local governments would be mandated to purchase certain types of steels locally, instead of importing it. The framework also applies to state-owned enterprises and government agencies such as Eskom, Transnet and the Airports Company SA.

Inspect transactions

The effectiveness of the strategy has been questionable, since there is no effective system in place to inspect the transactions of the mandated organisations (government agencies) to verify that they have been complying with the framework policy.

Three years after the introduction of the master plan in 2021, SA’s steel industry has not shown signs of recovery. It is therefore essential to recognise that most of the foreign players that have displaced SA steel in the local and the global markets (exports have declined) have far larger production runs than SA’s industries.

These production runs are facilitated by their large domestic markets, with far larger populations and higher disposable incomes compared with SA. Due to the large production runs of foreign competitors they naturally benefit from economies of scale. They can thus produce at lower costs, more effectively and afford to spend more on R&D.

In contrast, the fragmented domestic steel industry is having to cut down production runs due to low domestic demand, energy intermittency, logistical bottlenecks (rail and port inefficiency), and aggressive competition from small steel mills.

In this situation it is timely to reconsider the country’s competition policies and regulations, because the shrinking of domestic industries in recent decades has been attributed to several issues besides what seems to be the actual major problem — smaller and inefficient production runs compared with foreign competitors.

‘Safeguards’

SA’s industries should be permitted to consolidate so that large firms can merge, share production runs, buy smaller ones, share innovation budgets and collaborate in any other ways necessary. The only conditionalities that may be used as “safeguards” may include ensuring companies do not shed jobs unnecessarily through mergers or collaboration, and maintaining lower prices in the medium term. 

The price preference system that enabled small steel mills to buy local scrap metal for recycling at 20%-40% discounts on the international price will also need to be repealed because it has been placing pressure on larger producers due to the uneven playing field. 

The master plan says that integrated steel production is the most viable way to produce steel. If a steel manufacturer owns iron ore, coal and limestone mines, it is thus likely to be highly efficient and produces its product at a low cost.

Since SA has most of the critical minerals used in the steel industry, the departments of trade, industry & competition and mineral & petroleum resources, will need to negotiate with miners of the mentioned commodities so they prioritise aligning their production with local steel manufacturers. That would cause security of supply of the critical raw materials, the unavailability of which can reduce manufacturers’ competitiveness. 

Local steel producers should capacitate officials at the SA Bureau of Standards and National Regulator of Compulsory  Specifications (NRCS) and the auditor-general’s office, so that they can investigate and enforce compliance by public institutions regarding the strict purchasing of certain steels from the local industry, instead of buying imports, as determined under the Public Preferential Procurement Framework.

SA Revenue Service (Sars) and International Trade Administration Commission of SA officials will also need to be capacitated to ensure imported steel is not incorrectly classified at the country’s ports, so that it pays lower import tariffs than it should. The capacitation would ideally be through direct funding for additional staff who will be able to enforce these rules. The staff will also need to be trained on how well to perform in their roles. 

SA still needs to attend to the issues of energy security, rail capacity and port efficiency, because any failures at Eskom or Transnet will naturally translate into a faltering of the steel industry. 

• Tutani is a political economy analyst.