Inquiry into the South African steel industry. But will there be any constructive outcome?

The Competition Commission has gazetted draft terms of reference for a new market inquiry into the South African steel industry. The notice was gazetted on 7 April 2023 and public comments are invited on the scope of the inquiry on or before Friday, 12 May 2023.

In the Commission’s media statement there are some disturbing figures given. In 2014, the South African steel industry was ranked 19th in terms of global crude steel production and was the largest producer on the African continent, producing more than half of the continent’s steel output. In 2021, South Africa was ranked as the 32nd largest crude steel producer in the world, with an output of 5.0Mt. This indicates that South Africa’s competitiveness in the production and supply of steel has been declining. In 2004 production was 9.4 million tons per annum but this had dropped to 6.3 million tons per annum in 2018.

The inquiry will be confined to only two levels of the steel value chain; namely the raw materials and inputs and the upstream steel production level. In addition, the inquiry will focus on the impact of these levels of the value chain on the domestic downstream steel market. There are two themes of the inquiry. One will focus on the inputs and raw materials level of the value chain and the specific attention will be on iron ore and coking coal. With respect to iron ore, the inquiry will seek to foster effective competition and eliminate barriers to entry and expansion. In terms of coking coal, the inquiry will focus on addressing supply constraints and the costs of procuring this input.

The other focus will be on upstream steel production. The inquiry’s objective is to address the barriers to entry and expansion as well as promote competition for the benefit of the economy and consumers. At this level of the value chain, the inquiry will focus on the ownership patterns of steel mills in South Africa and the state of competition; Measures to promote entry and expansion of steel producers, in particular firms owned by small and medium businesses and/or firms controlled or owned by historically disadvantaged persons; Challenges faced by steel producers and factors surrounding the closure of some steel mills; Price setting mechanisms, including pricing trends in South Africa vs international pricing, and South Africa’s price cohesiveness; Pricing to downstream players and the role that traders play in price setting; An assessment of historical and current industrial policies in place to support steel producers and; The impact of the upstream steel producers’ behaviour on the downstream market – including availability of supply, pricing, and quality.

There is no secret about the South African export duties on scrap metal that came into effect and the government’s decision to extend the price preference system (PPS). Scrap metal, widely seen as a strategic resource, is an important feedstock in the production of downstream metals due to the relatively lower energy consumption and its lower carbon footprint versus other metal production processes. In recent years we have seen steel makers such as SA Steel Mills, Cisco, United Heavy Industries, Fortune Steel, Agni, SA Steelworks, Unica Iron and Steel and Veer Steel established. They all use scrap metal as their input source and through these companies many new formal employment opportunities have been created. So keeping this strategic resource at home might not be a bad idea.

It is also no secret that these mini mills all started because of the protection of South Africa’s only steel producer – ArcelorMittal South Africa (AMSA). They (the mini mills) needed alternative sources of supply of material because they and all the other steel processors, merchants and suppliers were being dictated to by AMSA operating as a monopoly, as everyone claims. The duties afforded to AMSA are also questionable and besides maintenance, what investment in the various sites it runs has AMSA made in recent years. Some even say the Steel Master Plan has been put in place to protect AMSA. So what constructive outcome will come from this inquiry?