Picture: 123RF/KITTIPONG JIRASUKHANONT
Picture: 123RF/KITTIPONG JIRASUKHANONT

The SA steel industry is a highly complex and diverse sector of the economy. It consists of large, primary steel producers such as ArcelorMittal SA, which produces steel from iron ore in blast furnaces; and Scaw and Cape Gate, which produce primary steel by recycling steel scrap in electric arc furnaces, and numerous foundries producing a range of products from steel scrap in induction and electric arc furnaces.

The primary cost elements in steel production are raw materials, labour, energy and capital. The cost make-up varies significantly across the steel industry. For example, the large, primary steel producers will have a high proportion of raw materials costs, with energy and capital also significant elements in their cost makeup. Labour is typically a single-digit percentage of total costs for the large, primary steel producers.

ArcelorMittal’s steel scrap costs will likely be a significantly lower percentage of total costs than that of Scaw and Cape Gate, whose primary raw material is steel scrap. In the foundry industry, steel scrap costs are a significantly lower proportion of total costs than in the primary steel sector, but their proportion of labour costs is much higher.

Energy, electricity and gas are significant costs across the entire steel sector but in the small foundry segment they probably account for a much higher proportion of total costs than in the primary steel sector.

Capital costs are a function of the amount of technology investment. ArcelorMittal’s capital costs as a proportion of total costs are most likely lower than their competitors because they have failed to invest in new technology over the years. In the foundry industry, a similar capital diversity is found in which some have maintained their investment in modern equipment and technology and others have not.

So one can see that the steel sector requires nuanced regulatory approaches that take account of its diversity and not the sledgehammer approach of one-size-fits all that Ebrahim Patel’s ministry typically applies. A case in point is the steel scrap policy, which, on one hand needs to retain a relatively small volume of good quality scrap for the foundry industry, and on the other ensure there is sufficient arising and collection of large volumes of low quality scrap for the primary bulk steel producers.

It is very difficult to achieve both objectives with a single policy.

A further factor is that each segment of the steel industry and associated businesses have their own vested interests and pressure points that are not necessarily aligned with one another. This makes reaching consensus within the government and industry on policy-setting very challenging.

To achieve a pro-growth agenda in the steel industry will require the government to exert less control and allow the free market to come up with innovative solutions driven by technology, skills and competition.

Laurence Erasmus
Via e-mail

JOIN THE DISCUSSION: Send us an e-mail with your comments. Letters of more than 300 words may be edited for length. Send your letter by e-mail to letters@businesslive.co.za. Anonymous correspondence will not be published. Writers should include a daytime phone number.

Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.