Steel industry under severe strain
US president Donald Trump’s announcement of punitive tariffs on steel and aluminium imports has added to the burden the SA steel industry is already bearing
The SA steel industry is undergoing huge structural changes, brought about by factors that include the 2008 global financial crisis, China’s cheap steel exports to the rest of the world, a lack of major infrastructure spending in SA since the 2010 soccer World Cup and empowerment regulations.
In addition, ArcelorMittal SA, the country’s largest steel producer, with about 70% of market share, is haemorrhaging billions of rand. And Evraz Highveld Steel & Vanadium, once the second-largest SA steel producer, is bankrupt.
News just in adds mightily to these woes. US president Donald Trump put world markets in a spin by announcing punitive tariffs on steel and aluminium imports.
He says these industries in the US have been "devastated by the unfairness of other countries" and by neglect by the US government itself.
Trump was expected to announce details about such tariffs this week.
In response, the world’s biggest steel producers, China and the EU, are threatening retaliatory action. The announcement has also caused much concern in SA’s domestic steel industry, which has been reeling as well from years of soaring administered prices for transport and electricity, amid shoddy service from such state-owned enterprises.
The SA Iron & Steel Institute (Saisi) says customs data shows that total domestic exports of primary steel products to all countries in 2017 came to 2.4Mt, or about 35% of SA’s estimated primary steel output of 6Mt. The value of these exports was about R26bn. The US makes up only about 10% of this.
"The SA steel industry held an urgent meeting with government on February 27 2018, requesting [it] to engage with the US government," says Johann Nel, acting secretary-general of Saisi. "A formal letter was sent to government requesting [it] to intervene and to request that SA [steel] exports to the US should be excluded from any actions announced by President Trump."
Though SA’s government has imposed basic WTO tariffs and also nominal safeguards on imported steel products, mainly to fend off cheaper Chinese imports, the domestic industry continues to flounder.
ArcelorMittal SA data shows that steel used in construction now makes up little more than 30% of group sales, well below the 50% of local steel output the sector usually takes up. The deficit took the group to a R5.1bn loss for the year to December 2017.
The company says, however, that it dispatched only about 70,000t of primary steel products to the US in 2017, which amounts to less than 2% of its total sales. "ArcelorMittal SA’s primary markets remain SA and Africa overland," it says in response to the threat of Trump’s looming tariffs.
But Paolo Trinchero, CEO of the SA Institute of Steel Construction, says US proposals are likely to have "a severe impact on our already strained industry" — for both primary steel and value-added exports. "Can we still compete with a [proposed blanket] 25% tariff and a stronger rand? I don’t think so. We could therefore lose up to 80% of our exports to the US," he says.
The right US approach is to apply to the WTO for antidumping measures, bound tariff rates and safeguards if necessary, he says. "This approach is a legal process that gives both sides the right of reply."
In terms of the changing steel landscape in SA, the competition tribunal has conditionally approved empowerment syndicate Barnes Southern Palace’s buyout of unprofitable steel producer Scaw from the Industrial Development Corp (IDC) for an undisclosed sum.
In 2012, the IDC bought a 74% stake in Scaw from Anglo American for R3.4bn. But its exposure to Scaw’s debt has increased as steel markets in SA have continued to slump.
The Southern Palace consortium has also recently bought the former Murray & Roberts civil construction and engineering business in SA and other fabrication assets, including for steel products, in accordance with government’s transformation plans.
However, with low economic growth and restricted government spending, it is a difficult time for empowered steel groups to enter the SA market. Michael Ade, chief economist of the Steel & Engineering Industries Federation of Southern Africa, says the body is "extremely concerned" about Trump’s potential actions regarding steel tariffs.