JOHANNESBURG – Commercial activity in the strategic steel industry of South Africa’s diverse metals and engineering (M&E) sector has literally gone soft, with both steel production and consumption generally deteriorating over a nine-year period spanning 2010 to 2018.
Moreover, 2019 proved to be very difficult for local companies, which found themselves in the doldrums, despite valiant attempts to navigate several curve balls and remain resilient.
Disconcertingly, the steel industry's performance during the year contributed to the slowdown of the broader M&E sector, which is estimated to have contracted by 0.6 percent.
Following a rare global steel recession last year (with the exception of China), the bends in the local steel industry have deepened alarmingly, urgently warranting a need for a consensus between relevant stakeholders and the government on how to structure short-term incentives, in order to revive the strategically important industry. This is important since the steel industry is again set to be weighed down in 2020 by a continuation of last year's weaker demand momentum.
As the economy expands, so does the need for steel to complete social and economic infrastructures, or increased demand from key steel end-user industries like construction, electrical and mechanical engineering such as cranes, automotive production, metal goods such as tools, other transport such as ships and aircraft, as well as electrical equipment such as generators and household appliances.
Therefore, it is imperative that South Africa does not become a net steel importer, which would leave it exposed to the vagaries of the exchange rates or imports inflation, with further negative implications on the current account, estimated at -3.9 percent for 2019. Although arguably not yet at a tipping point, the steel industry is in very serious difficulties and is doomed for even more trouble. Ongoing efforts to address the challenges faced by the steel industry, including Trade and Industry Minister Ebrahim Patel’s reconstitution of the Steel Committee and the development of a Steel Master Plan are laudable.
However, invariably administrative bottlenecks may delay the implementation of key recommendations, while fresh ideas expounded in the Steel Master Plan may only become effective with a lag of over five years after finalisation. As a result, the gap requires implementation of fundamental short-term interventions, since waiting is detrimental to the sinking steel industry, which provides roughly 150 000 jobs.
The government can ensure that companies capitalise on quick wins emanating from designation requirements for state procurement, which holds good potential in the short term, by rigorously enforcing designation on steel products – including on end-users doing business with the state – and allocating more funds for real capital spending.
It is to be hoped that, in addition to an encouraging rebound in real gross fixed capital formation to 4.5 percent in quarter three of 2019, increased budgetary allocations will boost spending by general government and public corporations to support private business enterprises’ real capital spending, thereby boosting local demand.
A plethora of challenges confront the steel industry, and these include constricting infrastructure spending, as outlined in our latest State of the Metals and Engineering Sector Report for 2020/21. Invariably, these have led to two distinct unwanted outcomes for the steel industry.
Firstly, the supply or production of steel for exports was negatively affected, resulting in a deceleration in year-on-year steel exports of 7.4 percent in 2019 and, secondly, domestic steel demand or consumption has greatly diminished.
Steel production and consumption in recent years have been dismal. From a steel production point of view and based on revised cross-sectional data, it was clearly a very volatile output trend for the local industry from 2010 to 2018.
South Africa's steel production capacity dipped from a supercharged output of 7.6 million tons in 2010 to 6.3 million tons in 2018, underpinned by a stagnant local economy and constricting industrial production, as well as decreasing global trade and manufacturing activity.
Over a nine-year period, South Africa's steel production declined by roughly 17 percent (1.3 million tons) to yet another nondescript level in 2018.
Contemporaneously, from a steel consumption viewpoint, as proxied by apparent consumption, it was another tale of contrasts between a stronger period spanning 2010-2013 and a weaker period spanning 2014-2018.
Over a nine-year period, South Africa’s steel consumption declined by roughly 7 percent, dipping from 5.5 million tons in 2010 to 5.1 million tons in 2018, also underpinned by nondescript economic performance and low demand from key local steel-consuming industries.
The data are more concerning when viewed from the heights attained in 2013, with steel consumption declining by roughly 18 percent or 1.1 million tons from 2013 to 2018. Moreover, the poor provisional data in 2019 for both steel production and consumption have reinforced the stance by stakeholders who pontificate – correctly so – that the steel industry may be fast approaching a tipping point.
For context, total steel production in Egypt, a comparator country, overtook that of South Africa in 2017 and peaked in 2018 at 7.8 million tons. Retrospectively from 2010 to 2018, Egypt’s steel production increased by 1.1 million tons or roughly 17 percent.
Alternatively, Egypt's steel consumption increased impressively by 2.5 million tons (approximately 27 percent) between 2010 and 2018, consuming a whopping 11.8 million tons in 2018, accounting for 30 percent of the continent's share.
Apart from dearth in demand, other constraints to the steel industry include intermediate input and raw materials costs, operational, logistics and electricity expenses.
Erratic energy supply or galloping electricity costs are a significant albatross on businesses, inhibiting competitiveness or nibbling into operational profits, with negative extrapolated effects on the steel industry's sustainability and employment.
In these tough times of stagnant domestic growth, heightened uncertainty and fragile business activity, the government should focus beyond just creating an enabling environment and collaborate closely with stakeholders in the steel industry in seeking and implementing targeted solutions.
The challenges to South Africa’s strategic industry are multifaceted. It is dying slowly, with companies closing down despite key government departments’ best efforts to assist.
Time is of the essence. Broader support is needed to boost demand, production and exports to attract investment.
Importantly, South Africa Inc, including development finance institutions, should identify and deal with blockages that are inhibiting the private sector's ability to engage in projects and develop a rican projects or intra-African trade prospects. This is important before the launch of the operational phase of the African Continental Free Trade Area agreement in July 2020.
Dr Michael Ade is chief economist of the Steel and Engineering Industries Federation of Southern Africa (Seifsa).