Johannesburg - The government will need to
stare down forces stronger than itself if it is to act on its intention to
fiddle with the steel market, where a glut of oversupply in the global industry
and unyielding input costs have squeezed the margins of many producers into the
ArcelorMittal SA [JSE:ACL] (Amsa) CEO Nku
Nyembezi-Heita this week sketched a sombre picture of the state of the
industry, which is dominated by China, and lamented the erosion of factors that
used to provide South Africa with a competitive advantage in steel
Her analysis of the market came a week
after Trade and Industry Minister Rob Davies said government was making
progress with a range of policy interventions aimed at securing cheap feedstocks
for a new steel-making entity under the auspices of the Industrial Development
The planned interventions include export
restrictions on scrap metal and securing iron ore, the key ingredient, from
mining firms at cost price.
The plan for the new steel facility is to
boost industrial activity with cheap supply, following government’s often
reported displeasure with Amsa over the steel manufacturer’s unfavourable
Speaking at a public forum in Joburg on
Wednesday, Nyembezi-Heita didn’t want to be drawn on the merit and viability of
government’s proposals, but nonetheless gave a bleak assessment of the
environment in which producers have to operate.
“There probably is no steel producer in
South Africa that is globally competitive, not us, nor anyone else,”
“What is interesting, though, is that this
is not only the case in South Africa. Steel producers are struggling across the
Carbon steel has yet to recover to the
levels seen before the financial crisis five years ago, when it traded for
prolonged periods close to record highs of $1 200 per ton.
The big margins steel producers achieved at
the time spurred many manufacturers to increase their capacity, which has since
the collapse of international markets and the onset of the eurozone crisis
never been met by real demand.
Steel is currently trading at about $720
Last year, global supply of 1.5 billion
tons exceeded demand by close to 100 million tons.
The most recent financial performances of
the world’s biggest steel producers make for sorry reading.
Amsa’s parent and the world’s biggest
producer, ArcelorMittal, in February reported a net loss of $3.7bn for last
year after writing down assets to the tune of $4.3bn.
For the same year, South Korea’s POSCO
reported a 35.8% decline in net earnings to $2.2bn.
Similarly, the net loss of Germany’s
Thyssenkrupp for the year ended September 2012 amounted to $6bn.
In South Africa, Amsa itself saw its
headline earnings plunge from R5.7bn in 2007 to a loss of R518m last year.
This despite the fact that the company has
always been able to count on a special pricing agreement for iron ore supply
from Kumba Iron Ore [JSE:KIO].
Nyembezi-Heita said the global industry’s
prospects were almost entirely dependent on whether China, which controls 47%
of the market (up from 12% in 1992), decides to cut back on production.
In South Africa, conditions that made Amsa
one of the world’s cheapest steel producers until 2007 have since completely
Nyembezi-Heita said: “We had the cheapest
electricity rates on planet Earth and relatively cheap labour.
Even though the South African steel market
wasn’t big enough to carry the capacity for steel making in the country, we
could export the rest.
“We didn’t have to worry over the exchange
rate because our sources of competitive advantage came from an entirely
“Fast-forward five years later, probably
nothing could be further from the truth.”
As it is, all South Africa’s steel
producers have a combined production capacity of 9 million tons per year, with
demand at levels of around 5 million tons.
Government has, however, already taken the
first concrete steps to establish a rivalling steel producer when the IDC in
December took a 20% interest in a R3.95bn bid for Palabora Mining (Palamin),
currently held by Anglo American [JSE:AGL] and Rio Tinto.
Palamin is primarily a copper producer, but
the IDC’s executive for mining and manufacturing industries, Abel Malinga, said
at the time the state-owned financier was solely after a 240 million-ton
magnetite dump - a by-product from copper mining activities.
Magnetite can be beneficiated as a
substitute for iron ore.
Malinga said the IDC recognised the current
depressed state of the steel market, but expected the situation to again change
from 2018 onwards.
“You will not have a situation were one is
subsidising the company,” he said.
- City Press
Follow Fin24 on Twitter, Facebook, Google+ and Pinterest.