But SA faces prospects of missing out on boom due to incorrect positioning

The global steel industry is set to undergo a radical make over due to the discovery and exploration of shale gas in the United Sates and other parts of the globe. Gas prices are set to remain at historic low levels for the next three decades and set to reduce the cost of energy.  This will force steel companies worldwide to rethink their business model, seeing that 40% of its costs are energy related. 

For South Africa to benefit from this and see its steel industry boost manufacturing and create jobs, the country could look to take a number of important steps to reshape its steel industry. “In order for South Africa’s steel industry to benefit as much as it could from the upside of lower gas prices, it should consider beneficiating its steel much further along the value chain.  Protectionism policies also need to be put in place to rebuild the intermediate steel value chain.” says Eugene De Klerk, Consulting Director at Deloitte. The Remaking of the Global Steel Industry: Lower Cost natural gas and its impacts, a Deloitte report on the global steel industry argues that most steel producing countries that use gas to manufacture steel, are set to benefit from a 30 year outlook of low gas prices.

Cheaper gas prices are expected to lead to increased use of Direct Reduced Iron as a favoured method of production. DRI leads to cleaner steel, but volatile gas prices over the last three decades made capital investment planning difficult.  The discovery of vast gas deposits in the US and elsewhere is likely to change this.  The price of DRI from gas compared to DRI from coal has been volatile and more expensive since the early 2000s. But this changed in 2010 when DRI from gas dipped below DRI form coal at $50 per ton of crude iron.  This lower price trend is set to persist well beyond 2030.
De Klerk points out that South Africa is potentially less likely to benefit to the same levels, due to take-off agreements not being in places as yet from the gas fields of Mozambique. De Klerk also points out that the two biggest drivers of job creation in the steel industry is the level of protection the industry enjoys. “South Africa levies very low import tax on steel yet there are major steel producing countries that levy a 100% tax on imported steel to protect its domestic industry” he says. 

South Africa should investigate similar options to protect its own industry, however imposing tariffs may not be the best solution as it poses the risk of contravening World Trade Organisation rules.  South Africa’s trade tariffs regime was shaped at the General Agreement on Trade and Tariffs, the predecessor to WTO, whose last round of negotiation was in Uruguay in 1992.   According to GATT South Africa is inexplicably classified as a developed country and has limited room to manoeuvre on imposing tariffs.  As such, it might be worthwhile for South Africa to revisit this classification. The textile industry was the first to suffer the effects of open trade and has barely been preserved in a much smaller scale than it was twenty years ago. Government’s efforts in urging South African companies to buy steel locally are correct, but only a reform of the sector will lead to the creation of new jobs.

South Africa currently processes significant volumes of its steel up to and intermediate state. It is then exported to other countries for further beneficiation only to be sold back to SA at higher value. A beneficiation policy has been on the cards for over a decade.  The two most commonly cited obstacles to successful beneficiation are the state of power supply and a shortage of skills. De Klerk says the skills shortage challenge is being addressed for the long term through improved access to Further Education and Training Colleges to help boost technical skills. Cheap and reliable power supply has been a challenge in SA ever since the country suffered load shedding in 2008, which led to a shutdown of mines.  Eskom’s move to a globally benchmarked cost reflective tariff, partly to fund its build programme to create new generation capacity, has led to an increase in tariffs. 
One mooted solution has been the introduction of Independent Power Producers to help supplement Eskom’s supply. But De Klerk notes that this process is slow and will cost the country billions on its balance of payment.

”What  South Africa needs is  a regional framework with its immediate neighbours for the supply of inputs such as gas as well as any excess  power to neighbouring countries to help them create their own beneficiation industry and in turn spur demand for South African steel, electricity and possibly skills.” says De Klerk. He adds that South Africa needs to create downstream linkages between raw materials and the finished product in order to create downstream manufacturing opportunities.

De Klerk’s concluding example of the shrinkage that steel manufacturing has undergone is that of alloy wheels. South Africa used to manufacture about 4.1 million units per year and export to other countries. Currently the country manufactures only 1,5 million units and imports any shortage.  The country needs to aspire to its former glory in this and other areas of manufacturing.