The current national energy crises that is affecting the country is set to have far-reaching effects in the South African steel industry, report a number of industry stakeholders.

South African Iron and Steel Institute (Saisi) secretary-general Peter Dieterich says that the energy crisis is affecting primary steel manufacturers needing energy to run energy-intensive production facilities.

“The steel industry currently does not have any indication of the real extent of the problem, and will not have any indication until the situation normalises. The organisation has already had word from Saisi’s member companies who have indicated to clients that delivery delays will occur and that production is being lost that cannot be recovered,” says Dieterich.

He adds that this situation will have far-reaching implications within the industry. Companies will export less steel and might not produce enough steel to serve South Africa’s needs. “This means that the large consumers and merchants within the country might need to import steel. This steel is not always readily available, which results in long lead times,” says Dieterich. This situation could create a need for steel producers to ration the supply of steel to customers in order to carry the company through the shortage.

Econometrix senior economist Robert Jeffrey adds that one of the downstream effects that the energy crisis will have is that companies within the industry cannot do business at a similar level as before energy supply concerns emerged.

Companies will now have to establish a new base and look to improve efficiencies. Jeffrey says that in the short to medium term this will be difficult. There will be costs involved and economic growth will suffer. In the long term, the positive effect that the energy crises will have on the economy is that consumers, both households and industries, will have to use energy more efficiently. In addition, it has also led Eskom to seriously consider supporting alternative energy sources, including sustainable energy programmes, such as provided by solar energy and wind, for the first time. This will benefit the country in the long term.

Jeffrey believes that government and Eskom will do everything possible to avoid allowing energy supply to seriously affect the productivity of critical industries, such as the steel industry, for extended periods of time.

One of South Africa’s largest steel producers, ArcelorMittal South Africa, has issued a statement outlining the effects that the power crisis has had on the company thus far.

The company says that continued power supply problems will have a serious impact on its operations, and, as a result, it will be unable to meet all its customers’ steel requirements.

ArcelorMittal South Africa former CEO Rick Reato says Eskom had indicated to the company that the imbalances between supply and demand were expected to last for a short period.

“Unfortunately, the company will not be able to meet all its customers’ needs as a result of the unfortunate events over which the company has no control. The company is advising its customers that it is experiencing a force majeure event.

ArcelorMittal South Africa continues to assess the full impact of the power shortages but steel processing and steel despatches will be delayed,” said Reato.

He adds that the company will undertake a detailed assessment of the potential impact regarding the supply to its customers and the situation will be communicated on an individual basis.

“All reasonable steps are being taken to minimise supply interruptions or any other adverse effects on the market,” said Reato.

The company said if the supply problems continue for about two weeks, the impact on steel supply will be about 300 000 t.

Reato said the company is busy engaging with Eskom at the highest levels, to find a solution to the matter.

Jeffrey says that he expects world economic growth to slow as a result of the slowdown in the US economy. “There will be a slowdown in the world economy, driven mainly by the slowdown in the US economy and fears of a recession there.

The slowdown could be fairly serious and last for some time. This will affect emerging markets in two ways. The first is the fact that the US is a significant importer of goods, particularly from China. A slowdown in China would negatively affect the demand for commodities in various emerging countries and steel demand would decline. The world is waiting to see if China, in particular, is able to weather the storm of the global economy. The current GDP growth in China could fall from in excess of 10% per annum to a more moderate but very acceptable rate of 6% plus. “

The second effect that a world economic slowdown will have is that investors will be a bit more conservative in investing in those emerging markets, including South Africa,” says Jeffrey. He adds that this, coupled with the current energy crisis and the country’s skilled labour shortage, will mean that the growth rate of the South African economy could be expected to slow down to between 3% and 3,5%.

The investment community is also being affected by the potential economic impact of the political changes. Future growth, however, is currently underpinned by the heavy infra- structure development expenditure programmes, such as Eskom’s capacity expansion programme, Transnet, Gautrain and other construction projects associated with preparations for the 2010 FIFA World Cup.

Jeffrey says that the start to 2007 for the domestic steel industry was positive but there was a decline in the second half of the year attributable to the economic slowdown brought on by rising interest rates and the introduction of the National Credit Act, besides other things. Exports decreased because of the commitment of local steel producing companies to serve the local market as a priority. Imports also increased over the period.

Saisi reports that the production of crude steel decreased by 6,4% during 2007 and amounted to 8 985 805 t. The lower crude steel production was mainly owing to the rebuild and modernisation of steel producer Arcelor-Mittal South Africa’s blast furnace D at Vanderbijlpark, and the upgrading of furnace No 1 at Highveld Steel & Vanadium, outside Witbank.
Apart from the current energy crisis, the second-foremost challenge facing the country is a skills shortage.

Although the accelerated artisan training project (AATP), which is being run by the Manufacturing, Engineering and Related Services Sector Education and Training Authority, will resolve this problem over the long term, the country is facing an immediate skills shortage. “The AATP is aiming to train and place artisans in the industry over a period of four to five years.

The students studying engineering and metallurgical degrees at universities will only be qualified within the next eight to nine years. However, we are facing an immediate challenge when it comes to the skills shortage. When these artisans enter the industry, they lack the knowledge and experience that an artisan of 10 or 20 years’ experience has. As a result, we need to retain these experienced artisans,” says Jeffrey. He adds that companies in South Africa struggle to retain experienced artisans who are often poached by international companies.

In an attempt to lessen the severity of the skills shortage, Dieterich reports that Saisi has a few programmes in place to assist in the training of skilled artisans.

One of the main measures in place is the Saisi bursary for first-year metallurgical engineering students at the University of Pretoria. The bursary is awarded to seven students a year. “Often after the first year of studies, the primary steel producing companies sponsor the student’s second and later years of the course,” says Dieterich. He adds that Saisi acts as a conduit for primary steel industry funds supporting the Professional Education and Training Scheme (Pets), which is administered by the Southern African Institute of Steel Construction (SAISC).

Pets provides bursaries for undergraduate and postgraduate students and promotes the professional development of practitioners in the structural steel industry. These initiatives have recently been further enhanced by the creation of the SAISC/DSE school of draughting. Dieterich adds that Saisi further channels primary steel industry funding to the Southern African Institute of Welding, which has made inroads in training in the field of welding.

“The world outlook for 2008 is clouded by the downside risks and uncertainties which developed in the global economy during 2007. Increasing concerns about a US recession, the strength of the euro against the dollar, the rise in oil prices and the global credit crunch have already translated into a decline in economic confidence,” says Dieterich.

He adds that the world steel industry enjoyed continued global growth in 2007. This was largely driven by the emerging markets. Dieterich says that globally, the industry faces a similar balancing act to that of South African companies, where the rising cost of raw materials is concerned. These costs are further complicated by logistical constraints. These factors and the shortfall the global economy is facing may slow down international trade, global supply and raw material availability from booming markets.

Dieterich reports that as a result of the energy crisis and other aggravating factors, 2008 steel exports could maintain 2007 levels, or even decrease for the year. The export of carbon steel products in 2007 totalled 1,98-million tons, which is a decrease of 15,5% on 2006 exports. This decrease was mainly driven by the commitment of the primary steel producers to serve the needs of the South African market rather than exporting steel.