Discounted iron-ore would give local manufacturing the edge

25th January 2013

By: Leandi Kolver

Creamer Media Deputy Editor


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South Africa will not have a competitive advantage unless it offers a discounted price for key inputs, such as steel, to the local manufacturing sector, Department of Trade and Industry (DTI) acting deputy director-general responsible for industrial development Garth Strachan says.

This is important for existing manufacturing companies, but it might also be one of the most important levers to secure foreign direct investment (FDI), he says.

“There is a misunderstanding that beneficiation simply means adding value of some kind to locally mined resources and exporting them to secure a greater income for the country in terms of exports. While this is important, the DTI regards beneficiation as adding value to resources to secure greater revenue for companies and the country through foreign exchange earnings and by having a global competitive advantage,” Strachan tells Mining Weekly.

South Africa no longer has the competitive advantage that it once had when the country had cheaper electricity, labour, transport and port charges. However, the country still has a significant resource endowment.

To secure FDI for the production sectors of South Africa’s economy, especially the value- added manufacturing sectors, the country has to entice investors with a range of incentives, such as those pertaining to taxes, and manufacturing competitiveness enhancement programmes.

“However, in addition to this, investors could be guaranteed a discounted price for key inputs into the production process,” he adds.

Strachan points out that steel, in one form or another, comprises the most significant input into a wide range of manufactured and value-added products.

“The steel input into products is as much as 70% in many sectors. However, owing to South Africa having near monopolies practising input parity pricing, what should be an advantage becomes a disadvantage, as steel, which arises from iron-ore value addition, is available to South African producers at the same price [charged] international buyers,” he explains.

Meanwhile, Iron Mineral Beneficiation Services (IMBS) CEO John Beachy Head agrees that there is an anomaly with regard to the iron and steel value chain.

“Mining companies taking the ore out of the ground are making money, while com- panies manufacturing steel products are struggling,” he explains, referring to JSE-listed ArcelorMittal’s announcement of a $3.5-billion issue of shares and convertible notes earlier this month that will sharply reduce a heavy debt level that has cut its credit rating.

News agency Reuters reported that the world’s largest steelmaker said the issue, the make-up of which had not been determined, would help reduce ArcelorMittal’s net debt to about $17-billion by the end of June from an expected $22-billion at the end of 2012.

“Unless we get on top of this issue, we are going to struggle to reverse the industrial decline in certain key sectors,” Strachan says.

Meanwhile, the African National Congress (ANC) ruled out the possibility of wholesale nationalisation at its fifth-third national elective conference in Mangaung in December, but stated that there would be a focus on bene- ficiation and social upliftment.

Commenting on this newly stated focus on beneficiation, Beachy Head states that he believes South Africa is in the ideal position to become a leader in iron beneficiation or iron making, which is also relatively unsophisticated and not highly capital intensive.

“South Africa has the opportunity to become a specific niche leader in this field,” he says.

Beneficiation Strategy
There are those who suggest that beneficiation, in the sense of adding value to primary commodities for the export market and the domestic manufacturing sector, should be the responsibility of the DTI only.

Thus, there would be a set of policy instruments, such as incentives, tax holidays, rebates, export guarantee support, export credit support and infrastructure support. “However, the decision made by Cabinet in December that a range of policy instruments, falling under different government departments, should be deployed to support beneficiation and provide the production sectors of the economy with a competitive advantage goes against the idea that beneficiation is not the preserve of government departments other than the DTI,” Strachan says.

The first critical objective to achieve higher levels of beneficiation will be included in the amendment of the Mineral and Petroleum Resources Development Act (MPRDA), which will secure the setting aside of a proportion of strategic minerals for local manufacturing at a discounted price and with strong ‘con- ditionalities’, Strachan explains.

“Steelmaking companies would, through this, not be able to receive a discounted iron-ore price and would not pass it on as a discounted steel price to the steel product manufacturer, which has, in many respects, been happening – companies are often tempted not to pass on the discounted price, but rather to use it to maximise their profits, which is not in the national interest.”

However, there has been a long delay in publishing the amendments to the MPRDA.

Meanwhile, various other instruments would also need to be implemented, as there are other structural fault lines in the South African economy, he says.

The first of these fault lines is the unimpeded, unencumbered export of scrap metal, which is closely associated with the theft of cables and other steel products.

Scrap metal can be regarded as a bene- ficiated product, as it is no longer iron-ore and, therefore, the process to turn scrap metal into metal products is much less energy intensive than the processing of iron-ore.

South Africa is losing a significant com- petitive advantage by exporting scrap metal in an unencumbered way, which is currently the case.

“In many ways, we are exporting that advantage, along with jobs, to other countries, specifically Asia,” he adds.

“While government has not precluded the possibility of an export tax on scrap metals, or other commodities, it believes that, with regard to scrap metals, the policy objectives could be achieved by using other instruments,” Strachan says.

Under the terms and conditions of the Trade Administration Act, government believes that it can achieve the same objectives as those of an export tax, Strachan states.

Exporters would have to apply for a licence to export scrap metal and a police certificate would have to be obtained to demonstrate that the items were not stolen. The exporter would have to be contacted, and would need a metallurgy licence to confirm that the items being exported are what the exporter says they are as there is evidence to suggest that the export of scrap metal in some cases masks the export of other value-added minerals, he explains.

The International Trade Commission of South Africa and the Department of Economic Development are putting these regulations in place; however, if the results are not satisfactory, government might tax the export of scrap metal.

Further, it is also important to create competition in the industry and initiatives are in place to achieve this, he says.

Strachan expresses the view that, in his understanding, these positions are not contrary to those adopted by the ruling party.
The vision set out in the National Develop-ment Plan, the programmatic approach of the National Growth Path, the actions contained in the Industrial Policy Action Plan and that which will be contained in the next iteration of the Industrial Policy will also strengthen this approach, he says.

IMBS Scrap Supplement Initiative
IMBS aims to be a component supplier to the steel industry at a higher value by supple- menting scrap, Beachy Head explains.

IMBS is working on two projects of 500 000 t/y each, one at JSE-listed copper miner Palabora Mining’s underground mine and the other in Phalaborwa, in Limpopo. Beachy Head expects one-million tons of SupaScrap to be produced in South Africa over the next five years, a large portion of which will be used for domestic steelmaking and the rest exported.

The first 50 000 t/y plant is being cold- commissioned and Beachy Head expects it to be fully operational by the middle of the year.

The company is targeting production of metallic iron at under $200/t to supplement ferrous scrap, which is selling at more than $400/t.
Through its SupaScrap process, IMBS is able to produce a product that has a density one-and-a-half times that of iron-ore, at four times the value. “
This is what true beneficiation is,” Beachy Head states.
IMBS has secured a 20-year agreement with Palabora Mining for the supply of 800 000 t of material from the company’s large 240- million-ton surface stockpile of 58% iron magnetite content, which has accumulated over decades of mining activity.

In December last year, mining majors Rio Tinto and Anglo America announced that they would sell a 74.5% shareholding in Palabora Mining to a consortium of South African and Chinese entities.

South Africa’s State-owned Industrial Development Corporation (IDC), which has a mandate to support South Africa’s bene- ficiation aspirations, and Chinese government-owned steel producer Hebei Iron & Steel Group will lead the consortium.

After the transaction, the IDC would hold a 20% stake in Palabora Mining with Hebei to take a 35% interest. A privately owned Chinese trading company would also take up a 25% interest in the company, while diversified group Tewoo would buy a further 20%, Mining Weekly reported in December.

Beachy Head states that the sale of the 74.5% in Palabora Mining will not change its agreement to supply 800 000 t of material.

“We are comfortable with this transaction. The IDC is one of the key players in the consortium that acquired Palabora Mining and as the IDC is also a 33% shareholder in IMBS, we believe it will benefit us,” he says.

Meanwhile, IDC CEO Geoffrey Qhena said the transaction also supported the development finance institution’s steel industry initiative, possibly reflecting the long-held view that the 240-million-ton magnetite resource could further be beneficiated in the interests of South Africa’s iron and steel sector, Mining Weekly reported in December.

New Steel Production Facility
Strachan adds that there is a new South African steel production facility planned, which will entail a combination of an international investor and industrial financing from development finance institutions.

“The IDC is leading the process and, while I cannot provide more detail, I can confirm that negotiations are at an advanced stage.

“Hopefully, in the near future, an announcement will be made which secures the inter- national partner with conditionalities. This will ensure that the problems associated with the commercial agreement which underpinned the unbundling of former State-owned integrated steelmaking corporation Iscor, which never secured a developmental steel price, are not duplicated,” Strachan says.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor


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