In a recent communication to members and industry Gerhard Papenfus, Chief Executive of NEASA (The National Employers Association of South Africa) gave his opinion on the steel industry in South Africa.

There is only one thing certain about the steel industry: It is a complicated economic environment to understand and ultimately, rescue.

Although every industry in an economy encompasses various role players, each with their own legitimate interests to pursue, the South African steel industry’s survival depends on finding the balance between the stark contrasting interests of stakeholders including a primary producer, importers, exporters, merchants, manufacturers, rerollers, scrap dealers, mini-mills, Government, steel- and trade authorities, trade- and labour associations and end-users.

At the heart of nearly all of the challenges experienced in the steel industry, lies Government’s actions. Whether it be the overregulation of the industry, the ‘personal stake’ in the primary producer, the inefficient enforcement of anti-corruption measures at ports and borders, the collection of revenue through excessive duties, not placing duties upon the importation of finished goods, the failure to support the industry with proper infrastructure at ports and via railways, or the unaffordable electricity tariffs.

The ‘balance’ to be achieved among the clashing interests of the various parties in this industry is an elusive goal when taking into consideration the following:

AMSA/Primary steel producer
South Africa’s primary steel producer finds itself in a precarious position. It has been on the verge of shutting down its long steel plants for a number of years and, barring a last-minute intervention, will now close permanently, causing thousands of job losses. Its troubles have maimed it to such an extent that it required massive financial Government bailouts, through the IDC’s investments and capital, as well as other forms of support such as UIF TERS funds to pay wages and subsidies for transport and electricity costs.

The danger of Government bailouts is a serious matter. Due to the degree of indebtedness of AMSA towards Government, there seems to be no other outcome than the ‘nationalisation’ of the giant, by the sale of its shares to Government in order to repay the loans. Every steel industry stakeholder knows what this spells – a state-owned primary steel producer, which will be another disaster. SOEs in South Africa have all failed dismally – and a nationalised AMSA will be no exception.

This begs the question – was this Government’s plan all along? To ensure the fall of AMSA, knowing (after meetings behind closed doors between ANC cadres and AMSA directors) that only Government could “bail” it out, playing the long con of an equity/loan swop?

AMSA’s troubles do not end here
Due to constantly increased competition from affordable imports of raw material around the globe, AMSA also persisted with safeguard and anti-dumping duty applications on a wide array of tariff codes and products, in order to protect itself. These duties, once granted, started bleeding the downstream dry.

In addition, due to Government’s business-hostile economic policies and transformation-entrenched red-tape, AMSA’s international mother-company never saw it fit, beneficial, profitable or sustainable to invest in the upgrading, expansion or modernisation of AMSA.

The closure of this crippled entity would undeniably be a blow to the primary manufacturing capacity and capability of the South African steel industry.

However, the alternative of dragging it along into an uncertain and loss-making future while being unable to provide the steel sector and preventing the import of material by virtue of duties, may well not prove to be the long-term answer to the quandary of retaining our steel industry.

Some role players have asked if it would not be better to get a foreign investor/owner to take over AMSA. Although possibly the lesser evil to ‘nationalisation’, this ‘solution’ does not come without risks.

Any foreign investor would insist on continued protection from imports in the form of tariffs and duties, and most probably ensure that its negotiations with Government for the ‘purchase’ of AMSA includes provisions regarding special rail- and electricity rates.

Around the world, steel giants have done these types of takeovers of primary steel producers, with the promises of bringing in new technology and new foreign markets, but then “inadvertently” killing all other exports to countries in which that giant already has a mill.

Mini-mills
Another group of stakeholders who are at loggerheads with the primary steel producer and other stakeholders, with a lot of Government aid, are the mini-mills.

These producers have received billions in Government investments. In addition, the Price Preferential System (PPS), which is hurting every other role player in the industry, benefits the mini-mills greatly, as they can obtain their input material at prices that are bleeding dry the scrap dealers and the export revenue streams of other steel companies in the industry.

Thriving mini-mills, viewed in isolation, are not necessarily detrimental to the industry; however, taking into consideration that they cannot produce all the quality long- and structural steel required by industry, at least not yet, they cannot be looked to as an instant solution for the industry’s overall declining manufacturing capabilities.

The creation of mini-mills is not a natural phenomenon driven by market needs, but the result of massive Government investment as part of the Black Industrialists Programme. Any organisation created as a result of market demand would naturally fill a gap and strengthen the particular sector sustainably. However, where production capacity is artificially created, where no need exists, it exacerbates the oversupply in the market, leading to a distortion of the entire sector.

And, naturally, the mini-mills’ biggest policy benefit, PPS, is to the direct detriment of other role players. Considering what happened to the primary producer after extensive Government involvement, the stake Government has in the mini-mills should also be viewed with trepidation.

Steel downstream
The steel downstream is often coupled together as a singular group, however, in reality, it is an extremely fragmented group of interests, depending on the nature of the company, their range of services and/or products, and whether they import and/or export.

The steel downstream has suffered under the same unfavourable economic circumstances created by Government, as the primary steel producer – high electricity costs, lack of efficient rail infrastructure, unaffordable wage rates and mounds of red tape.

However, Government’s incessant meddling and attempts at controlling or regulating the industry led to further lopsided beneficiation and damage to the different stakeholders in the downstream.

Buyers and manufacturers of primary steel are suffering the brunt of the import duties imposed by ITAC, in its granting of protection to AMSA, whilst other product manufacturers down the value chain cannot compete with duty-free imports of finished goods from Asia.

This is the crux: the moment Government started meddling in the steel industry, the natural order of the free market and its principles were distorted. And now, as a result, every policy amendment, every imposition of a ‘protection’ measure to benefit one group of stakeholders, will negatively impact another, furthering the imbalance experienced by an already dwindling industry.

Now what?
Globally, there is an oversupply of steel, which generally contributes to the current lower prices. However, this is nothing unusual or excessive; steel, as a commodity, has always experienced this typical cycle of ups and downs in both pricing and supply. The greatest factor that contributes to the lower price, as well as the oversupply of steel, is the advancement in technology which led to the production of steel being faster, more efficient and therefore more affordable. In addition, the South African steel demand and consumption are a quarter less than what it used to be a decade ago. This exacerbates every ache and pain experienced by steel stakeholders across the industry.

Why is the demand for steel so poor? This can, once again, be attributed to the business- and economically hostile policies of the South African government. Investors are hesitant to start projects in a country where there are restrictive and risky transformation requirements attached to every business step. B-BBEE, Employment Equity, the threat of expropriation, extremely high taxes, unfavourable import and export legislation, and an array of other corruption-flavoured obstacles have scared away even the bravest of investors.

There are not enough construction-, infrastructure-, and engineering projects to drive the demand for steel to the extent that would ensure the sustaining of our steel industry.

So where do we go from here? That is the multi-billion-dollar question.

Stakeholders in the steel industry are all in agreement that the lack of economic growth is the root cause of all that ails it and for that, Government has to take the blame.

Unfortunately, that is where the agreement among stakeholders ends. How to deal with the declining steel industry, how to divide the dwindling spoils, remain huge points of contention.

Will industry, despite their different interests, band together in an attempt to save the bulk of the sector, by pressuring Government to remove its claws from this industry? What would this ‘release’ look like? Government will not easily relinquish financial stake held in manufacturers, such as the primary producer and the mini-mills, nor wave goodbye to the revenue streams created by import duties. Our government, due to its vested interests, acts as a stakeholder in this industry instead of the ‘honest broker’ the industry needs.

Does Government have the business sense to act in favour of the greater good of the private sector and scrap all of the unnecessary and stifling red tape and transformation requirements? Does Government have the political will to fix the underlying infrastructure issues experienced by the ports and railways?

Or will Government have to be forced? If so – who would force them, and how?

Gerhard Papenfus is the Chief Executive of the National Employers’ Association of South Africa (NEASA).