Scaw Metals Group: Seek growth in Africa

28 Nov 2014
Financial Mail
Charlotte Mathews

As the SA government dawdles over its planned infrastructural investment programme, local steel businesses are seeking survival and growth in other African countries. But they will need to be competitive to secure a foothold in new markets. From around the world, steelmakers with excess capacity are eyeing planned transport links and power-generation projects in Southern Africa.

Namik Ekinci, chairman of the Turkish Steel Exporters Association, who headed a delegation of steelmakers visiting SA recently, said the delegation was looking for opportunities to buy and sell steel in SA and other African countries. SA was a good hub for the Southern African region, and "if we improve our presence in SA, we know that the other African markets will be even more accessible to us", he said.

Steel has been identified by the SA government as a longer-term developmental industry, meaning it has the potential to grow downstream businesses and jobs. To do this, government believes it needs to intervene to increase competition in steelmaking. The Industrial Development Corp (IDC), government's major funding institution, has been studying the feasibility of establishing a third primary steel producer to compete with ArcelorMittal SA and Evraz Highveld Steel.

Last year the IDC underwrote the R3,4bn purchase by a consortium of 74% of Scaw Metals Group from Anglo American. Scaw Metals is a long-established secondary steel producer selling specialised products such as grinding balls, foundry-cast products and wire rod to the mining, construction and rail industries. Primary steelmakers use iron to make steel while secondary producers use scrap metal. Scaw Metals executive chairman Ufikile Khumalo says the IDC's intention is to grow Scaw and make it competitive so it can be a global player and beneficiator.

Last year Scaw's production was similar to 2011's 674000t and Khumalo expects the local market will remain subdued for some time. Scaw's manufacturing capacity is concentrated in SA, apart from one facility in Australia, but it has distribution centres in Europe, Australia and elsewhere in Africa. The group plans to grow geographically, rather than its product range, though it will continue to innovate in its existing range, Khumalo says. It is eyeing growth opportunities in Ghana, Zambia, the DRC and Zimbabwe. Khumalo hopes the IDC will bring together some of its other steel investments within the Scaw group as Scaw has the capacity to manage them.

But will government intervention and protective measures help SA's steelmakers to compete internationally? It doesn't seem likely, yet Chinese government protection of domestic industries enables them to undercut international competitors. "If you have competitors, you are more alive and more dynamic," Ekinci says. "Don't be afraid of competition, be afraid of closed economies and protectionism."

He says production, export and import of steel are mutually dependent and are mostly positively correlated. In Turkey, he says, steel production has grown 8% annually since 2000, while imports have increased 13% and steel exports have risen even faster, by 18% annually.

But government has already intervened in SA to assist steelmakers like Scaw that depend on scrap metal. Scaw is one of the biggest local users of scrap steel, which is plentiful in SA from a range of recyclers, but has become hard to get because scrap merchants can often realise better prices by exporting the metal than selling it locally.

In May, the International Trade Administration Commission of SA (Itac) gave notice in the Government Gazette that for the next five years scrap metal must be offered to local buyers for a period and at a price determined by Itac. Khumalo supports this measure, but says it is not protectionism.

If Scaw can source its raw materials at the best price, it can be more flexible in its pricing to its customers. The World Steel Association quotes an OECD report on its website showing that in 2009 at least 19% of scrap iron and steel, exported by a total of 34 countries, was subject to export restrictions. These were usually justified by the need to safeguard domestic supply, control illegal exports and protect local industry.