SA has lost millions of tons of steelmaking capacity. Is it too late to save it?

Rising costs and crumbling transport, energy and water infrastructure have proven insurmountable obstacles for huge swathes of the steel industry, and over the past five years, around five million tons a year of steelmaking capacity has been lost. Moreover, the story behind the decrease in steel demand in SA is a microcosm of what is happening across the country, writes Charles Dednam.

Aggregate steel demand in South Africa hit an all-time high in 2008, buoyed by grand infrastructure projects including the FIFA 2010 stadiums, the Gautrain and OR Tambo airport upgrades. Since then it has been in precipitous decline.

Aggregate demand provides an overall picture of the health of a sector. Aggregate demand in the steel industry includes normal domestic steel consumption, the steel consumption generated by private capital investment, the steel consumption generated by government spending, and the net steel trade position (steel exports minus imports).

The combined aggregate demand for all sectors will equal a country’s gross domestic product. The story behind the decrease in steel demand is a microcosm of what is happening across the country, and has been for two decades.

Investment is the biggest contributing factor towards demand creation. Infrastructure development’s impact on economic growth is significant. More than 60% of the aggregate steel demand goes to building and construction, of which the major activity is infrastructure development. Government launched a bold infrastructure investment plan in 2012, but little came of it. A revised plan was launched in 2020. Delays and interruptions have followed.   

Rising costs and crumbling transport, energy and water infrastructure have proven insurmountable obstacles for huge swathes of the steel industry, and over the past five years, around five million tonnes a year of steelmaking capacity has been lost. While South Africa has moved backwards, other countries have surged ahead. As a result, while South Africa once represented 0.8% of global steel production at its peak in 2006, that level is below 0.2% today.

Steel production is an enabler of economic growth. The erosion of our manufacturing capacity has not only had a direct impact on jobs and value created, we’ve missed out on the potential for enhanced economic activity. The World Economic Forum estimates that every dollar spent on a capital project (in utilities, energy, transport, waste management, flood defence or telecommunications) generates an economic return of between 5% and 25% per annum.

While domestic growth has been poor for two decades, demand in the rest of the continent has been strong. But we have cut our legs form underneath ourselves, and have been unable to service this demand. The opportunity is there, but instead of using that opportunity, we have gone backwards.

Up until 2005, South Africa exported about half of its primary steel production, but since then exports have steadily declined to 17% of total sales in 2021. There is now little room to cater for local steel demand spikes relative to production. Meanwhile, Egypt’s steel production has more than doubled, as has Morocco’s. Both counties have superseded us as steel producers.

Our ability to improve our overall steel demand position substantially with a dedicated effort towards value-added exports is hampered by the same factors hampering overall domestic demand: transport infrastructure, and raw material and energy costs affecting competitiveness.

What needs to happen to turn this situation around and give us a chance to preserve at least some industrial capacity? Unfortunately, there are no easy fixes. The underlying factors inhibiting our economic growth are well entrenched.

Our distribution networks have failed. Power, rail and port costs have surged while service levels are shockingly poor. Facilities sit idle because raw materials are not delivered. Finished products sit in warehouses, unable to reach ports, and demurrage costs add up. Customer relationships suffer in the face of constant delays.

Preferential pricing is unevenly applied, placing cost pressures on certain parts of the industry. And meanwhile labour unrest and strikes hamper the country’s overall competitiveness. 

One advantage we do have is that we are clear on the problems we face and what needs to be done to surmount them. A glimmer of hope in this regard has emerged through the development of the SA Steel Masterplan (SMP), which looks at short-term measures to stabilise the metal industry and long-term goals and strategies for the industry to grow. The SMP will, however, stand and fall on our ability to implement it.

I believe there is strong support from government for re-industrialisation and for rebuilding the manufacturing industry. The metal and engineering sector is a large part of our manufacturing industry and is critical to almost all other sectors of the economy. Government acknowledges this.

The revitalisation of a committed infrastructure programme will go a long way towards ensuring domestic demand is sustained, and business confidence is supported. And in terms of exports, there is immense potential across the continent in the context of the African Continental Free Trade Area.

It is too late, however, to save South Africa’s steel industry by treating it in isolation. If we are to retain an industrial capacity in South Africa, we need to put ourselves onto a path of national growth and competitiveness. 

Charles Dednam, Secretary-General, South African Iron and Steel Institute (SAISI).