Posted on 24 Apr 2015
WHEN SA’s second-largest steel maker applies for business rescue as it can no longer continue as a going concern, it reflects as much on incoherent government policies as it does on the plight of the steel industry itself.
The steel maker, Evraz Highveld, has had its own particular set of flaws, and the Russian owners, who bought Highveld Steel & Vanadium from Anglo American in 2006, have reportedly been trying to exit for some time. But it is hardly the only South African steel company making losses. The whole industry has been losing money for the past three to four years, says the Steel and Engineering Industries Federation of Southern Africa’s economist Henk Langenhoven.
The industry has long been volatile and difficult, but the global market has been particularly tough lately as China’s steel makers have ramped up their exports and cut their prices in response to slowing domestic growth. And SA’s domestic market has been hit from all sides: with cheap imports swelling supply at a time when demand is extremely weak; and sliding global and domestic prices at a time when the cost of inputs such as electricity and labour is rising and the supply of those inputs is unreliable.
But the industry’s woes would probably disappear into the background if the sales volumes were there. They are not, and that is in significant part because of the failure of the government’s infrastructure programme to take off. The expansionary fiscal policies the government pursued to support the economy since 2009 were a lot more about consumption spending on public-sector salaries and grants, than about investment spending. What we’re seeing in steel is a consequence of that.
But Evraz Highveld’s demise has also again brought questions of industrial policy to the fore, especially given some rather odd comments from the Department of Trade and Industry’s Garth Strachan, who said steel was a critical factor in the government’s industrial development strategy.
The government should know all about the state of the steel market, given that the Industrial Development Corporation is a 74% shareholder in another former Anglo American steel maker, Scaw Metals, and that the government has ambitions to go into the steel business itself.
One might imagine that, with prices crashing, the obsession of our industrial policy makers with "development prices" to help develop downstream industry would have gone away — if cheap steel were the swing factor, we should have seen all sorts of downstream folk come out of the woodwork. But though the developmental pricing idea has gone relatively quiet, it hasn’t gone away, with the emphasis over the past year on beneficiation by the mining industry and developmental pricing for "strategic minerals".
The striking comment from Strachan, though, was that the government had never put political pressure on Evraz Highveld for a developmental steel price. The government certainly has put such pressure on ArcelorMittal SA, though, and that company continues in talks with the government on a pricing model to satisfy those "developmental" demands.
One has always had a strong sense that ArcelorMittal SA, which is the old Iscor, and Sasol are targets because of their history as state-owned enterprises — perhaps it is felt they still owe SA something.
The pressure on mining reflects a similar sense of entitlement, and given the deep slide in commodity prices over the past three years, the idea that mines should cut prices to promote downstream industrialists seems increasingly out of touch with market realities. In mining, it has been a case of the government, prompted apparently by Trade and Industry Minister Rob Davies, this year going back on a "minegate pricing" model that had been agreed with the industry and pushing instead for a strategic minerals model, which is akin to the developmental pricing idea.
Anglo American CEO Mark Cutifani has argued that it makes no economic sense to demand of SA’s mines that they subsidise inefficient downstream producers. Why downstream manufacturing doesn’t develop as the government hopes is a much bigger issue than just input pricing and it is time the government went back to the drawing board to puzzle out why successive industrial policy action plans have done so little.
They look increasingly outdated anyway in a world of global supply chains in which countries don’t make buckets because they have steel or polymer makers or autocatalysts because they have platinum, but find whatever they are good at and make whatever niche product they can make well. SA still has to find that.
