There can be no doubt that the sluggish global and local economies are having a largely negative impact on the South African steel industry. This is to be expected, since strong economic growth leads to an increase in construction projects and thus a higher demand for steel.
Unfortunately, explains Tafadzwa Chibanguza, Senior Economist at the Steel and Engineering Industries Federation of Southern Africa (SEIFSA), the current situation is the opposite of this, with Treasury indicating that the SA economy is only growing at a rate of around 0.5%.
“Low-level growth means less consumer consumption of products that use steel – such as motor vehicles – while large construction and mining projects tend to be put on hold,” he says.
Chibanguza points out that in the past year, the steel and engineering sector has undergone a considerable contraction. When the nine months to September 2016 are compared to the same period in 2015, the sector contracted by 2.11%.
“More importantly, when the 12 months to September 2016 are compared to the 12 months ending September 2015, the sector can be seen to have contracted by some 4.18%, which is quite a significant reduction.”
South Africa is the only steel producer in southern Africa, which should make the Southern African Development Community (SADC) region an ideal playground for local steel producers.
While this was once the case, states Chibanguza, today, the massive Chinese steel-producing industry has created vast excess capacity, meaning it is able to sell the product into the market virtually at cost price.
“While we do have some forms of protection for local industry within our borders, once we are trying to compete internationally, we are directly up against the Chinese. Not only can they offer steel at such cheap prices, but by virtue of so much Chinese investment in other sectors, countries often almost feel obligated to buy steel from them.
“This puts our local industry in a really difficult position. Clearly, until such time as we get our own economy firing again, things are going to be tough. There is clearly a lot resting on how quickly commodity prices rebound, as we won’t see a lot of new investment in the mining sector until this happens.”
Politics and labour
The political situation in the country is also creating a lack of investor confidence, and it should be obvious that, with mining projects being so capital-intensive, no one is going to risk such a large investment if the political situation is unstable.
“Both our industry and the economy as a whole need the political volatility to decrease and the situation to become steadier. Without this, we are not going to see the kind of big investments required to kick-start things.”
He points out that another potential hurdle facing the steel industry is the 2017 wage negotiations. The more than 4% contraction in the sector over the past year was significantly worse than the 3% originally anticipated by the industry.
“This means that production is currently falling faster than employment, which means we expect additional job losses in 2017. This is particularly bad in light of the fact that in the first two quarters of 2016, we have already shed 15 000 jobs. The challenge with the wage negotiations is that if the agreement reached is abnormally higher than inflation and production, it will ultimately lead to further job losses, as the industry is already in a position where it cannot sustain the employees it currently has.”
Not all doom-and-gloom
Despite the current crisis in the sector, Chibanguza suggests that there remain a few positives too. This includes a positive effort from government, through the Department of Trade and Industry and the National Treasury, to try find solutions, including a more protectionist focus, which will help to keep the SA steel industry viable.
“Another potential highlight is the possibility of the projected gas pipeline from Mozambique being built, which – thanks to government’s focus on local steel only – will help to create some demand for the sector,” he says.
Additional relief is expected as commodity prices rise, something economists are now indicating will happen over the course of the next few years.
“Initially, these were expected to remain flat until at least 2020, but the latest reports have revised the commodity price estimate upwards. Therefore, we can anticipate a growth in investor confidence to follow this and it will hopefully lead to additional capital investments in the mining sector in the longer term. So, although things are quite tough at the moment, and the steel industry can probably expect things to dip further before they improve, at least there appears to be some light at the end of the tunnel,” concludes Chibanguza.