The speed with which countries will recover from the devastation wrought by Covid-19 will depend, in part, on how best they use their unique advantages, says mining investment company Menar MD and cofounder Vuslat Bayoglu.
As a country endowed with mineral resources – such as coal, manganese, iron-ore, chrome, gold, platinum group metals – South Africa is well-placed from a mineral resources comparative advantage perspective.
“Take manganese, for example. South Africa is the world’s largest producer. The mineral is indispensable in steel production. And we supply more than 50% of the global seaborne manganese,” says Bayoglu, whose company has interests in a manganese project in South Africa.
This makes South Africa strategic for steel and electric vehicle manufacturing in the global market. However, there are some challenges that should be tackled to enable the country to exploit this comparative advantage to the fullest, he adds.
It is not enough to be the world’s largest producer while failing to secure the maximum benefits associated with this title.
“One challenge that should be tackled is the declining capacity of domestic steel manufacturing.”
Trade data shows how little beneficiation happens in South Africa. Of the more than 14-million tonnes of manganese produced a year, South Africa exports just over 90%. While this is good for export earnings which totalled about R43.7-billion in 2018, it also means the country is not exploiting the production capacity to boost manufacturing of steel and related products in South Africa, states Bayoglu.
Part of the problem is that South Africa watched for years as low import tariffs and competitive imports combined to erode domestic manufacturing capacity.
“We can do nothing about it and fail to lift our job creation potential. Why worry when we can get cheap steel products from China? Or we can try to coordinate efforts among different stakeholders to rebuild manufacturing capacity,” suggests Bayoglu.
Attempts to use tariff hikes to protect domestic manufacturing have triggered domestic battles among stakeholders in the past. Local producers and labour have long been at loggerheads with the Department of Trade, Industry and Competition as they pushed for protective tariffs to save local manufacturing and jobs. However, importers are quick to complain about the risk of inflation induced by high tariffs.
“But protective tariffs alone cannot prop up domestic manufacturing. There must be concomitant measures. State-owned power utility Eskom will have to come to the party and start producing a cheap and reliable electricity supply to promote local beneficiation,” notes Bayoglu.
He advances that the power utility must be assisted to fulfill its nearly century-old mandate. Policymakers could also consider the Malaysian model, where the power utility has special rates for the ferroalloys industry.
“Yes, we must keep the exports going and, where possible, increase volumes and drive earnings upwards. But there is a related challenge: managing price volatility. China, the leading global steel producer, is also the largest importer of South Africa’s manganese.”
South African producers and traders must manage the demand and supply output without distorting the market. A failure in foresight has resulted in unnecessary price volatility in the past.
It is important to keep track of China’s manufacturing data and manage production levels that promote fair pricing without harming the sustainability of mining operations and unnecessarily causing a spike in steel prices.
As many countries are injecting liquidity in their economies for post-Covid-19 recovery and looking to implement demand-side measures, many will use huge infrastructure projects as stimulus. Demand for infrastructure-related products like steel is likely to grow. Manganese will therefore be critical, says Bayoglu.
“Mistakes of the past must not be repeated. When multibillion-rand contracts for the procurement of new trains and locomotives at State-owned entities Transnet and PRASA were concluded, some suppliers and their associates escaped local content requirements, cheated on local procurement, corrupted black economic empowerment and diverted public money to undeserving entities.”
That was more disempowering not only to the local manufacturing but also to South Africans who needed jobs, stresses Bayoglu.
This means balancing raw material exports of minerals like manganese and implementing prudent domestic beneficiation strategies as well as reasonable domestic content requirements.
“With the right strategies we can attract investments in downstream beneficiation,” advances Bayoglu.
South Africa has done extremely well on provision of logistics for the growth of the manganese sector, with Transnet being the biggest contributor to the growth of manganese exports, he says.
“It benefits immensely from manganese export boom. In the year ending 2019, the company registered a record volume of 14.3-million tonnes, up from 13.7-million tonnes of manganese moved by rail the previous year.”
Transnet reported that in April of the same year, it launched the largest production train in the world in Saldanha, with 125 wagons of manganese. It supported the operations of Kalagadi Manganese, the only 100% sinter beneficiating manganese producer in the country.
In the year ending 2019, growth of manganese freight helped offset decline in other export commodities such as coal, says Bayoglu.
“This shows the importance and potential of manganese. More can be achieved if stakeholders can agree on rebuilding South Africa’s steel producing capacity which will help diversify demand, manage international price volatility and keep input costs such as electricity competitive,” he concludes.