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Local steel demand suffers 5% yearly contraction

DOWNWARD SPIRAL
Steel production fell in the first quarter of the year

DOWNWARD SPIRAL Steel production fell in the first quarter of the year

Photo by Bloomberg

10th July 2015

By: Bruce Montiea

Creamer Media Reporter

  

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Steel demand in South Africa has suffered a steep decline over the past eight years, having contracted by an average of 5% a year since 2007, says growth consulting firm Frost & Sullivan Africa.

Frost & Sullivan industrial business unit research analyst Tilden Hellyer notes that this dip was preceded by two decades of consistent demand growth, estimated at 1% year-on-year.

He tells Engineering News that steel production also fell by 9.4% in the first quarter of this year to 1.6-million tons. “Unfortunately, there is no remedy for this shrinking market, with some steel mills running at a very low capacity owing to the decline in domestic demand.”

Hellyer adds that, to achieve mutually beneficial outcomes, industry bodies must work more collaboratively with stake- holders. Some industry challenges can be mitigated by improving operational efficiencies, managing fixed-cos increases and considering more robust sourcing and supply. He notes that the industry is mindful of customer needs and expectations, as there is a focus on dependable delivery and consistent service.

Hellyer addds that government is still not doing enough to support the steel industry. “The country is looking to the East when it comes to awarding tenders, to the detriment of local suppliers. For instance, State-owned rail company Transnet’s R50-billion train tender was recently awarded to China,” he says.

Further, while doing business with Brazil, Russia, India and China – the other nations that comprise Brics – is collaborative, it must not be done in a manner that takes business away from South Africa.

State-owned power utility Eskom has also placed the steel industry under severe pressure as a result of ongoing load-shedding, in addition to engineering strikes in the metals and mining industry.

Hellyer further points out that growth in the construction industry has slowed, failing to stimulate higher and sustained steel demand.

He notes that uncompetitive manufacturing landscapes and overall high costs of doing business in South Africa limit the export potential for domestic steel producers and end-user segments of the market.

Hellyer adds that, while efficiencies at steel plants have improved, it is still a challenge to keep costs below those of China. However, he notes that the three-year wage agreements reached in the steel and mining industries in July last year augur well for improved investor sentiment, as does the improved outlook for government infrastructure spend.

“The roll-out of government’s infrastructure spending programme is a key opportunity not only for the primary steel industry, but also for many of its customers,” he says.

However, he notes that the delays in rolling out the projects have prevented any significant plans coming to fruition. He therefore believes that a more concerted infrastructure investment drive is critical to alleviating the profitability challenges currently being experienced by the primary steel industry.

Hellyer points out that the period leading up to the 2010 FIFA World Cup in South Africa saw the steel industry performing remarkably well, with a peak in steel production reaching 9.7-million tons.

Potential for Growth
While South Africa’s steel industry has several long-term growth opportunities for the short and medium term, opportunities are more readily available in the Southern African Development Community (SADC) region as a whole.

“The SADC countries have an infrastructure master plan in place, signed in 2012, that extends to 2027. “This plan outlines various verticals, such as transport, energy, and information and communication technologies, which are priority areas for the member States.

“Together, the verticals comprise a total estimated investment of $200.62-billion – the opportunity speaks for itself.”

Hellyer adds that, should the Grand Inga hydroelectric power project, in the Democratic Republic of Congo, get under way, the transmission and distribution of power will require millions of tons of steel spanning several countries in Southern and East Africa.

Meanwhile, in South Africa, the Renewable Energy Independent Power Producer Procurement Programme’s preferred Round 4 bidders, announced in April, will demand high-quality steel to ensure their projects’ success, says Hellyer.

He further points out that Energy Minister Tina Joemat-Pettersson announced 13 additional private- sector bidders last month, which means Round 4 comprises a total of 26 renewable-energy projects that are yet to start.

“Although the opportunity is exciting, the projects’ steel demand is still unclear, as well as where these private projects will prefer to source their materials,” concludes Hellyer.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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