Government intervention crucial for a sustainable steel industry in South Africa

By Tami Didiza

Louis Brandeis famously coined the phrase, “Sunlight is the best disinfectant”.

Given the repeated willful misrepresentations peddled by the steel mini mill companies of the Electric Steel Producers Association (ESPA), it is in the public interest not only to set the record straight regarding their unfounded claims, but to reveal the inconvenient truth behind their operations.

Before doing so, it may be useful to provide some context regarding the steelindustry. A sustainable steel industry in South Africa will be able to contribute to economic growth and job creation, support infrastructure development and contribute to the country’s decarbonisation goals, while at the same time creating an opportunity for the development and export of greener steel.

Unfortunately, the sustainability of the steel industry has been threatened due to national constraints such as high energy and logistics costs as well as the creation of a playing field that is not level, due to preferences such as a scrap export tax, scrap price preference system and preferential funding provided to the mini mill sector, all to the detriment of the rest of the steel industry.

In light of the recent decision by ArcelorMittal South Africa regarding the closure of its Longs Business, the government has recognised the need for intervention and to work towards creating a level playing field to ensure a vibrant and competitive steel industry.

It is therefore unfortunate that the recipients of these significant unfair advantages over a prolonged period should now express concerns about a “distorted market” when funding has been made available to ArcelorMittal South Africa.

The entire existence of the steel mini mills sector has come about at great cost to the Industrial Development Corporation (IDC) and the South African taxpayer.

Some R14 billion of IDC money has been poured into the founding, operations and ongoing support for ESPA members.

Additionally, a number of these companies have been unable tooperate successfully and could have closed had the current dtic policies of scrap intervention though the Price Preference System, Scrap Export Tax and an export ban not saved them over the last five years.

Despite government support and protective policies, a number of ESPA member companies have still gone into financial distress. In addition to the significant IDC funding these mini mills receive a scrap steel subsidy of some R5-6bn per year –all of which is effectively funded by the producers (manufacturers, fabricators, etc) and collectors of scrap.

Steel mills on the coast that operate in a Special Economic Zone benefit from an additional 10% discount in addition to a 30% PPS discount.

They also benefit from investment incentives such as paying no corporate tax for 10 years, along with SARS/PAYE subsidy benefits. Critically, they are also the beneficiaries of lower electricity charges and import duties on steel products in the order of at least 10%.

With respect to ESPA claims of job creation, regrettably the opposite is true, an estimated 50 000 scrap collectors have lost their jobs and income merely to fund a small number of mini mills. There is no scrap shortage in South Africa.

The scrap reservoir of South Africa is abundant as the historical generation of steel has always been higher than the consumption of metal.

However, scrap prices have been pushed to below the cost of salvaging obsolete scrap - resulting in lower scrap supply. Scrap is often found inland dumps in remote areas as it has been made economically unviable to collect and transport it to an ESPA mini mill.

Were the ESPA mini mills to offer international scrap prices of R7 000 per ton, they would find abundant scrap available. This would increase jobs and boost the competitiveness of South African manufacturing industry.

Unlike publicly listed steel producers who share their operations, financials, labour, and sustainability practices through public records and annual integrated reports, ESPA companies operate without publishing their results or opening their operations to public review.

In addition to financial and operating aspects of ESPA mini mills that merit further examination, some questions have emerged about potential anti-competitive conduct that may warrant attention from relevant authorities.

Greater transparency in the protected mini mill steel sector could potentially benefit the entire South African steel industry value chain, as well as consumers and taxpayers.

It should be noted that mini mills are largely utilising scrap that can be used to support the country’s decarbonisation efforts to produce largely low value products.

In essence, the mini mills are induction furnaces with simple and basic technology in scrap melting that produces lower value-added products such as rebar and a limited range of commercial quality sections, which cannot be used for critical engineering applications.

The limited product range is often exported as billets – in effect, this uses valuable electricity to make a product that is exported and beneficiated outside of the country, instead of maximising local beneficiation.

The government intervention to allow a deferral of the wind down of the AMSA Longs Business provides an opportunity for the fundamental structural issues facing the steel industry to be addressed, and to place it on a sustainable path by removing the market distortions that have been created.

Tami Didiza is ArcelorMittal South Africa's group manager for stakeholder management and communications.

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