It has become cheaper to import finished products manufactured overseas than to manufacture engineering steel in the country, which has resulted in more than half the country’s foundries closing down, laments specialised steel and industry expertise company Special Steels MD Byron Ferguson.

He notes that, with South Africa’s scarce manufacturing facilities, options for having a special piece of steel forged are limited and costs are higher, leaving many companies with no choice but to import.

As a result, Ferguson notes that the steel industry is attempting to adjust capacity to meet this demand, which has drastically decreased, in line with the manufacturing sector’s contribution to the gross domestic product (GDP).

“This has presented South Africa with some strategic problems, including the possibility of losing the ability to manufacture its own steel and limited local availability to steel manufacturers.” The industry is further being affected by protectionist policies, which refer to defensive policies that limit unfair competition from foreign industries, while hampering domestic industries’ ability to compete globally.

The protectionist policy has resulted in higher input costs for the downstream steel industry – a burden it must bear while trying to compete.

Protectionist Policy

Ferguson says it makes sense why local protectionist policies are important, but they are being mismanaged, as government should not be allowed to impose import tax duties on goods that South Africa does not manufacture.

“About one-third of a ton, used by Special Steels clients, cannot be produced locally, but there is a 10% duty on it, which clients of Special Steels are forced to pay.”

Ferguson adds that the industry’s issues with the policy should have been flagged by government straight away, and warns that, if not resolved timeously, complications will arise.

Contributing Factors
The steel industry is suffering a steady decrease in demand, resulting in fewer blast furnaces, forge shops and foundries, as well as steel manufacturing’s decreased contribution to GDP, says Ferguson.

There has also been reduced interest in large-scale mining activity in South Africa, which directly affects the country’s steel consumption. In addition, the increase of manufacturing costs in South Africa, in conjunction with the fall of commodity prices at the end of 2013, has led to completed products being imported more regularly, he adds.

Moreover, the steel and mining industries are interconnected, with 90% of steel sold by Special Steels being used for mining machinery. “If prospects for the future look dim for mining in South Africa, this too will have a direct, negative impact on the steel industry,” mentions Ferguson.

Labour unrest and union difficulties add to the uncertain climate of the local steel industry. Labour strikes have made for a difficult business environment, and high labour rates and militant strikes add to this burden.

The volumes of special or engineering steels have been declining by about 10% a year over the past three years, says Ferguson, with companies having to diversify into other areas of steel to maintain a constant tonnage. Although diversification meant Special Steels’ tonnage did not decrease, it did remain flat, with no increase.

Further, increasing costs for electricity and the renting of warehouse space also make the industry a challenging environment because these costs are difficult to sustain amid decreasing demand.

Demand for steel has shifted from new projects and new machines prior to 2014 to more machine repair after 2015. “Previously, a company would have bought enough steel to manufacture a new machine, but now only buy enough to make the necessary repairs. The volume of cutting has also increased over the past four years . . .” says Ferguson.

The global steel industry’s issues are much the same as South Africa’s – older domestic steel mills must compete with newer, more efficient mills in the East, and combined with higher domestic manufacturing costs and China’s export subsidisation policies, this has resulted in the imposition of protectionist policies globally.