The recent publication of the first Steel Report by the South African Iron and Steel Institute (SAISI) confirms what Duferco has been arguing for a while: The government’s attempts to use tariffs to protect the local steel industry in the person of ArcelorMittal South Africa (AMSA) have backfired spectacularly. As a result of this flawed approach, argues Duferco CEO Ludovico Sanges, government has effectively gutted the country’s ability to produce its own steel, at a huge cost in jobs.
“The ostensible aim of the tariffs was to protect our primary steel producer, AMSA, from cheaper steel largely produced in China. Despite the extensive tariff protection provided, AMSA has actually reduced its capacity and has proved unable to meet the demands of downstream players such as Duferco. As the report makes clear, this now means that South Africa is no longer able to produce enough steel for its own needs and has thus lost its status as a steel exporter,” Mr Sanges says.
Duferco CEO Ludovico Sanges
When the protective tariffs were gazetted, several conditions were imposed on AMSA. Of these, one bound AMSA not to adjust the current pricing model of the steel offered to domestic rerollers, and another to preserve jobs and not close any plants. Neither of these conditions has been met.
Despite agreeing to preserve jobs and not close any of its plants, AMSA went ahead and closed down its most modern plant, Saldanha Steel, in 2020. Duferco South Africa was created as a joint venture between Duferco and the Industrial Development Corporation to beneficiate the steel produced by Saldanha Steel. Since closing Saldanha Steel, AMSA has not been able to supply steel needed by the country reliably at the correct quality via its outdated Vanderbijlpark facility.
For example, in 2017, a three-year supply agreement between AMSA and Duferco commenced, but during the term of the contract, AMSA proved to be unable to meet its contractual obligations in terms of on-time delivery.
Rerollers, like Duferco, have essentially been forced to exit the local market because they cannot access the raw product (hot-rolled coil) they need from AMSA, and tariffs on imported product make rerolled product uncompetitive on the local market.
“Using imported hot-rolled coil we are ironically able to compete successfully on international markets since the local tariff does not apply,” he adds. “Our local reroller industry is competitive and could also supply the local market if only we could obtain the hot-rolled coil we need at the right price reliably but with the tariff protection in place, that’s not possible, to the detriment of the South African economy as a whole.”
Duferco has repeatedly approached the authorities to have the tariff protection afforded to AMSA reversed for rerollers given the adverse effect it was having on the local steel industry due to lack of competition, but to no avail. However, as the new Steel Report shows, the consequences of the government’s unwillingness to look beyond AMSA to the interests of the whole steel industry has now been revealed.
One of the Report’s key findings is that despite South African steel demand rising by an “astonishing” 36% after the end of the Covid-19 lockdown, much of this demand had to be met by importing steel. In fact, from having been a net exporter of steel, at the beginning of 2020, South Africa became an importer of steel. Even worse, because our local rerollers do not qualify for a rebate, the price of the finished goods has grown dramatically, this in turn has led the downstream industry to turn to overseas producers.
“In other words, despite our surplus steelmaking capacity, for example, the mothballed Saldanha Steel plant, South Africa had to import one-third of our steel needs last year. This is truly shocking,” Mr Sanges says. “If the government’s much-heralded infrastructure spend materialises, for which huge amounts of steel will be needed, that deficit will only rise. We have truly thrown the baby out with the bathwater.”
“I can only hope that Minister Patel and his colleagues will read this report carefully and take its lessons to heart. We need a competitive steel industry to fuel growth and job creation, and protecting an inefficient supplier like AMSA is not the way to get it. In fact, misguided protectionism has all but destroyed our local steel industry.”