While trade union Solidarity forecasts that domestic demand for steel and steel product is expected to grow by 1.2%, Solidarity deputy general secretary Marius Croucamp notes that the steel industry is facing serious challenges, both at a primary steel producing level and in the downstream value-adding industry.
He notes that dumping of galvanised steel and hot-rolled coil (HRC) on the primary steel producing level also continues to be a major factor, with the downstream industry experiencing the dumping of seamless and normal tube, roof sheeting, galvinised wire rod and nuts.
Amid these challenges, Croucamp says reduced demand for steel products, exacerbated by slow economic growth and lack of government infrastructure spend, combined with high electricity prices, further curtail the industry outlook for the future.
“The current steel industry outlook will also be adversely affected by a possible industry strike on wages, with reduced investment in the steel sector, owing to possible further ratings downgrades from rating agencies,” he laments.
The South African steel and engineering sector, Croucamp explains, currently makes up 29.3% of the country’s manufacturing sector. He notes that what is of particular concern is the downward trajectory on production, employment, investment and profits. This is owing to external and internal factors.
He points out that structural adjustment in this regard comes in the form of a long-term downsizing of the industry as a whole. The industry being victim to persistent recessionary conditions over the past few years, with 25 000 job losses experienced in the past three years.
External factors are listed by Croucamp as being the oversupply of steel on the world markets by China, with its highly subsidised steel that is dumped on the market at prices below local cost prices. Dumping is when a product is sold at a price that is less than what it cost to produce the product.
Internal factors include the negative growth of South Africa’s economy, slow response by government to protect the local industry, and lack of infrastructure build programme roll-out, reports Croucamp.
In the past year, he mentions that the local steel price has increased drastically, mainly owing to global price movement. “In 2016, iron-ore moved from $40 to $80, and coking coal from $90 to $210. This led to domestic steel producer prices increasing by 34% in rand value, and 28% at merchant level in rand value.”
Renewed Steel Interest
Meanwhile, Solidarity communication officer Mia Slabbert highlights that the South African government showed renewed interest in the steel industry early this year. She points to the decision that domestic steel, as well as locally made products and components must be used in public sector construction projects, as a clear attempt by government to boost the steel industry and prevent its downfall.
Leading steel company ArcelorMittal South Africa (AMSA) revealed in February this year that a new pricing model for flat steel products was promptly approved by government.
According to Slabbert, the company will calculate the price of flat steel products on an import-weighted basket price – a pricing agreement with government that ensures that an agreed ‘fair basket price’ disallows any deviation in pricing.
She explains the methodology behind the price of flat steel products, stating that the price is based on domestic selling prices in 12 countries across Europe, Asia and the US. The Department of Trade and Industry will audit the basket on a quarterly basis, and has the right to insist on the application of a discount to steel customers, should it find that AMSA has been overcharging during the period.
In May this year, AMSA secured a R4.5-billion revolving credit facility to finance its working capital requirements, which, according to AMSA, will have a 36-month tenor.
Emergency import tariffs on HRC were also be implemented last month. Slabbert reports that the safeguard tariff will be 12% in the first year, 10% in the second year and 8% in the third year. This safeguard tariff will be introduced in addition to the 10% duty already in place.
In May, Engineering News reported that AMSA insists that the institution of a 12% safeguard duty on HRC from July 1 will not result in a commensurate rise in domestic prices for the primary-steel product, owing to a pricing agreement with government that regulates the setting of domestic flat-steel prices.
The safeguard, which is in the process of being authorised by the World Trade Organisation, will be introduced in addition to the 10% duty already in place for HRC, thus raising overall protection for the product to 22% for a three-year period.
Engineering News further reported that prices could, in future, rise or fall depending on international price trends and the exchange rate, but will not be directly influenced by the 22% tariff protection. Instead, the aim is to curb “subsidised” HRC imports and enable AMSA to recover domestic market share.
AMSA reports that, while flat-steel imports peaked at above 1.1-million tons in 2015, the 887 000 t imported in 2016 still represented an increase against historical averages. AMSA argued successfully that the 10% tariff is, thus, insufficient to deal with the import threat.
The safeguard is limited to HRC and plate, but AMSA may also apply for additional protection on cold-rolled steel in future and is also weighing its long-steel options, owing to increasingly difficult tradition conditions for long products.
In fact, AMSA has launched a review of its long-steel operations at Newcastle, in KwaZulu-Natal, where liquid steel production has already been curtailed, owing to weak market conditions and high scrap prices.