The decision to put South Africa under lockdown as part of its response to Covid-19 “has put further pressure on the steel industry”, says research organisation Trade and Industrial Policy Strategies (Tips).

In a policy brief, it elaborates that, depending on the length of the lockdown and the rate at which business and consumer confidence returns, the economic impacts could be less, or more, severe.

With the global steel industry considered to be in a “disastrous” situation, this has serious implications for domestic steelmakers, Tips laments.

In the short to medium term, the organisation says global steel prices are likely to plummet to $330/t, compared with $505/t at the start of the year.

Additionally, with global steel production expected to decline by 13.3% to just over 1.6-billion tonnes, with China’s forecast to be down only 6% to 940-million tonnes, China’s steel production will account for 58% of the world output.

Tips warns that domestic steel prices, on an international parity basis, are poised for a significant fall while domestic steel consumption is expected to be below 3.3-million tonnes this year – a 26% year-on-year decrease.

This is down from the 4.5-million tonnes in 2019, meaning that a major part of the forward order book is cancelled.

The estimated steel capacity use rate is now around 65% with negative contribution to the cost of production, and as such, South Africa’s lockdown is considered “devastating”, with an estimated accumulative negative cash cost implication around R1-billion inclusive of labour and fixed costs.

Specifically, and on a high level, Tips notes that the lockdown is disrupting demand in a market where demand was already weak and shrinking. However, the loss of sales over the short term is impacting the cash flows of every industry in the supply chain, meaning that liquidity is the most significant issue that the steel industry is facing.

Working capital is stuck owing to a lack of industrial activity, and nonpayment by first-tier steel users is caused by their customers (the second and third tiers) not paying, such as the construction companies, component manufacturers and mines.

According to Tips, this lack of liquidity will force a spate of defaults and possibly some parts of the industry will not survive this crisis, “not because they are bad businesses, but simply because the flow of cash dries up”.

Manufacturing companies integral to the supply chain of South Africa Incorporated may not recover, which Tips says will have a longer-term impact on the competitiveness of some sectors.

Over the medium to long term, the organisation notes that global steel in 2021 is expected to recover by about 6%, which is still 7% below the 2019 production levels of 1.8-billion tonnes.

With steel production far below global capacity levels, steel prices internationally will remain under severe pressure.

As such, this means that domestic capacity use could fall to around 50% for long steel, with dwindling steel demand in the wake of poor business confidence levels.

However, an extended recovery is expected, to the prior-Covid-19 industry performance levels, which will most probably only be realised beyond 2021, according to Tips, and with consolidation and restructuring on the agenda.

Given the problems in both the domestic and the export markets, plans for reopening mean that, after the lockdown, the steel mills can immediately start delivering finished goods which are already produced, awaiting delivery.

The rolling mills will be restarted to transform work-in-process steel into finished products with a lag of around two days to stabilise the production process.

Steelmaking will be different. Although electric furnace operations could be up and running within a week from lifting the lockdown, the restarting of blast furnaces and liquid steelmaking could have a longer response time and will depend on the demand seen from the market, based on both the market’s appetite for finished goods and the forecast demand from the customers, Tips explains, noting that the blast furnaces were idled to allow a flexible restart date.

Some of the mini mills will require some emergency funding on reopening. However, Tips notes that consolidation will be needed if the plants are going to reopen and be sustainable.

“This needs to happen quickly,” it emphasises.

Further, the halting of steel production, even if only for one or two months, will have a significant impact on suppliers to the industry, and the demand for services and consumables which are part of ongoing operations, will be zero when steel production is halted.

“Many small and medium-sized companies that are part of the eco-sphere of a steel plant will suffer without ongoing production and some will close,” Tips reiterates.

Because of this, the organisation believes liquidity and cash flow is the most significant area where government can support the industry and says such intervention is urgent.

It proposes a possible solution, stating that the Industrial Development Corporation could create a temporary lending/bridging facility to provide payment-term relief to customers of the steel industry, possibly administered by one of the industry bodies.

According to Tips, this will allow steel mills to offer extended payment terms to customers of 60/90/120 days rather than the standard 30 days, and it will also allow South Africa-based manufacturing to weather the short-term impact to cash flows.

Tips suggests that a possible mechanism to unwind the credit could be a 5% repayment a month for next 24 months, with a payment holiday in December/January. Repayments could start in July 2020 or three months after the end of the lockdown.

However, Tips says any interventions need to also cater for large businesses with a turnover in excess of R50-million a year, as these businesses are not coming from a position of strength owing to the difficulties the steel industry has encountered over the past 11 years.

Additionally, it suggests that the upstream steel industry be given an exemption from the Competition Commission to work together to “save whatever is possible to save”.

“Urgent action is needed from government to protect the manufacturing industry and keep capacity, which may need to include an immediate review of imports to prevent a flood of products into the market from countries that have opened up earlier, and have excess stock which is then dumped into South Africa’s market.”

Overall, the organisation says the Master Plan process – which is currently under way for the steel industry – will need to “be reshaped to ensure that it supports structural improvements for an industry that has been severely impacted by Covid-19”.