Financial Mail, 27 August 2015
By Mark Allix
SA's big steel producers are in deep trouble and events are overtaking their ability to save a key but rapidly disintegrating sector, writes Mark Allix.
In unprecedented crisis in SA's steel industry has led to a series of closed-door meetings in recent months, culminating in an unusual alliance of labour and business calling on government to adopt 10 “core collective demands” to prevent a tsunami of job losses in a key sector of the economy.
Among these demands are the imposition of tariffs to stop rampant cheap steel imports from China; the designation of steel for government infrastructure spend; and the "urgent rollout" of the state's 18 strategic integrated infrastructure projects. They also include demands for transparency in the capital expenditure programmes of state-owned enterprises; the banning of scrap steel exports so that local industries can benefit; and delaying the implementation of the proposed carbon tax on the sector.
The crisis comes as SA's second-largest steel maker, Evraz Highveld Steel & Vanadium, wallows in business rescue. ArcelorMittal SA, by far the country’s biggest steel producer, says it may close its specialised Vereeniging plant (see next story). More will be known about the fate of both companies by the end of this month. But the path to redemption is strewn with red tape.
The prospect of thousands of job losses is now so real that labour unions including Cosatu, its breakaway affiliate the National Union of Metalworkers of SA (Numsa), the National Union of Mineworkers, Solidarity, the United Association of SA, Metal & Electrical Workers Union of SA, and CEOs of ArcelorMittal SA, Evraz Highveld and Scaw Metals Group, along with representatives from distributor Macsteel and the Steel & Engineering Industries Federation of Southern Africa (Seifsa), have all taken part in the series of unprecedented talks.
So broadly worrying are these events that last Friday's meeting in Pretoria was also attended by representatives from Transnet and government departments. But it may already be too late to save the domestic industry, despite the state’s “commitment” to impose tariffs of up to 10% on steel imports.
The steel industry is part of the broad metals and engineering sector in SA that is intimately linked to the fortunes of the mining, construction, energy, infrastructure and automotive value chains. These sectors employ about 8m people. The steel industry itself employs 190 000 people directly plus another 100 000 employed by suppliers. Together, these sectors contributed 17%, or about R575bn, to gross domestic product in 2014, and huge amounts of foreign exchange.
"It's an unprecedented crisis. We have never seen this before, it is a perfect storm but we are not losing hope," says Ufikile Khumalo, executive chairman of the country's third-largest steel producer, Scaw Metals, in his capacity as president of Seifsa. "But if you do nothing today then there is no industry to talk about." It is still far from clear where things are going. But judging by the tone of a statement released jointly by the department of trade & industry (DTI) and economic development this week, it is h going to be a bumpy and politically charged road.
Included in its list of possible remedies is a competition probe on steel pricing. SA's poor economic showings has become the heated subject of mainstream politics. Democratic Alliance leader Mmusi Maimane says instead of taking responsibility for poor implementation of policy and some poor policymaking, President Jacob Zuma and his cabinet blame global economic conditions for the country`s woes.
It remains to be seen whether business labour and government can do more that paper over their ideological differences for the benefit of the country. Many observers see the nation's economic pain as largely self-inflicted, despite continuing unstable global economic conditions.
Arcelor Mittal SA CEO Paul O'Flaherty says any progress that has been made by the parties involved in talks doesn't mean things will happen immediately. He says there is now a public progress that needs to take place involving interviews, documentation and more official applications.
"It is not a lifeline and we must be clear on this - and labour will probably argue with us. There are good solutions on the table, but no quick fix today." He says the primary application for tariffs against imports will be approved next week. "There is a commitment from government to apply bound rates on primary steel. The rest will take time, "he says.
Bound rates are general tariffs between zero and 10% that may be immediately applied to imports of primary steel under World Trade Organisation rules. But there are subsequent protracted bureaucratic process to cover a myriad other steel products. Many countries including some of SA`s Brics partners, have already imposed such tariffs, and even anti-dumping duties on Chinese steel imports.
Foster Mohale, manager of communication services at tariff administering agency the International Trade Administration Commission of SA (itac), say the normal period for tariff investigations is "six months for normal investigations and four months for industries in distress." The agency is variously answerable to the ministers of trade & industry, fin ace, and economic development.
"There is no delay. In terms of domestic law including tariff investigations regulations, there is a procedure that must be adhered to, "Mohale adds. "In isolated cases where there are complexities and challenges in the industry concerned, an investigation can take six months." Companies and industry federations in the steel sector first made applications for the imposition of tariffs in December last year.
To date, Itac has conducted a site visit at Evraz Highveld's Emalahleni plant to analyse the company's income statements and production costs, as part of a process to determine whether a 10% duty is warranted. Mohale says applicants are requested to fill and submit an application form, together with all supporting documentation.
"In light of the complex, technical and legal nature of the information required in most cases, applicants hire consultants and lawyers to prepare their applications and make representations," he says. "Government has been aware that there is a crisis in the steel industry," Numsa general secretary Irvin Jim says. He adds that the union refuses to accept it will take a year to implement tariffs.
"Very soon we will be demanding that we need our Iscor (as ArcelorMittal SA was known under former state ownership) back."
Among labour and the steel industry's "10 core collective demands" put to government, there is the crucial matter of "fair pricing for steel versus import price parity." This is probably the most political and ambiguous of the many issues surrounded the sector. It is far from clear what "fair pricing" is in respect of different government, labour and industry perceptions.
"We are as competitive as China, but I don't get a US a ton subsidy from government," O'Flaherty says of Chinese steel makers. "We need to get an anti-dumping commitment (against China) by government as soon as questions of due process will allow."
Pricing of steel is part of a much broader issue of designating more domestic steel products as inputs for government's R4 Trillion infrastructure programme. The state has long demanded a "Developmental steel price" from ArcelorMittal SA, a subsidiary of the global ArcelorMittal group based in Luxembourg. It has even gone so far as to demand that this notion of pricing be within the lowest quartile of word steel production.
But O`Flaherty says there is no definition of a developmental price for steel anywhere in the world. The company is working with the government “to have an appropriate price of steel from an ArcelorMittal SA perspective.”