By Yu Meng.
South Africa’s once collapsing steel sector is making a slow but firm recovery as demand for 2017 may grow as much as 25% compared to 2015 to reach an expected 6.1 million tons. What’s more, the National Treasury has given instructions for local content to be favoured in public sector construction projects.
On the supply side, although the South African government has been persuaded by the sector to increase tariffs to fend off imports from China, the problem of supply exceeding demand will persist.
The rising steel price has been a relief to producers, yet the industry has not fully broken away from contraction. Total South African crude steel production in 2017 will not match the 2015 level. According to the South African Iron and Steel Institute, the top five steelmakers account for 25,000 jobs, but now retrenchments appear to be inevitable.
According to global mining and metals expert Michael Elliott in EY’s 2014 Global Steel report, the permanent shutdown of high-cost capacity was the only real solution to bring balance to the global market, “both corporate and government leadership is necessary to make this happen”.
The South Africa government is taking action. In the spring of 2015, a special task team was assembled within the Industrial Development Corporation (IDC) in the hope of rebooting the lack of cost competitiveness in the local steel industry. The special task team is planning a US$4.5 billion (ZAR58.5 billion) steel mill project that can produce five million tons of low cost products a year.
A Chinese state-owned giant has been invited to invest. Hesteel Group (HBIS), China's largest steel company with a ZAR66.6 billion market cap and over 40 million tons annual capacity, is actively seeking opportunities to transfer its excess steel capacity out of China, following instructions by the Chinese government.
HBIS is known for its low cost production. By introducing a plant into the African market and armed with government support, Chinese expertise, limitless financial support and the biggest capacity in the industry, the IDC is aiming to consolidate the sector for greater efficiency.
The Masorini spirit
The IDC steel mill project team is named after South Africa's famous iron-making heritage, the Masorini heritage site. During the 19th century, Masorini was inhabited by the Sotho speaking BaPhalaborwa, who developed an advanced and sophisticated industry of mining, smelting iron ore and trading iron products. Trade between the BaPhalaborwa at Masorini, the Venda in the north and the Portuguese on the east coast increased and ensured greater independence for them.
The Masorini spirit is in great need now. South Africa's largest four steel companies have reported losses since 2014 due to lower than expected domestic economic growth, weak domestic demands, erratic electricity supply, and Chinese competitors taking over international markets.
After years of waiting, the HBIS have entered the fray. “We are a financial institution, we don’t have that industry knowledge and insight, so we rely on HBIS to provide it,” said the team leader of Masorini, Gerrit Kruyswijk.
IDC’s first cooperation with HBIS was co-financing the acquisition of the South African mining company PMC in 2013. The investment has allowed HBIS, the third-largest steelmaker in the world, to experience operating overseas mature mines for the very first time.
MOU and JV
In 2014, the pair, together with the China-Africa Development Fund (CAD Fund), signed the "South Africa Steel Project MOU" in Beijing. In the joint venture, HBIS will control 51% of the shares, IDC 39%, and CAD Fund 10%.
Originally, the IDC had planned the capacity to be 2.5 million tons, but HBIS insisted on more to lower production costs. “It also has to do with the size of the plant they built in China,” explained Kruyswijk, “Because the engineering and design company MCC has got a completed design for this.” MCC (China Metallurgical Group Corporation) is a long term partner of HBIS. MCC designed a steel mill with the same five million tons capacity for HBIS in China.
“If you look at the main equipment that is used in this [new] plant, it comes in a specific maximum size, so you design your plant around industry norms, and five million tons is quite a normal size for a new steel plant, ” explained Kruyswijk. “It is actually an international standard in terms of size and equipment specifications.”
The design will be converted to South African standards by Hatch.
Gerrit Kruyswijk joined the team in April 2015. The team has been busy with the pre-feasibility study since 2015. The next milestone is determining the steel mill’s location, which was supposed be announced by mid-November 2015. The IDC planned to complete the feasibility study by 2016, and start operation by 2020. Yet nothing has so far occurred according to the plan.
To pave the way for this huge investment, the IDC, together with the Department of Trade and Industry, the Department of Economic Development, the Department of Mines and Energy, the Department of Water and Sanitation, South Africa national electricity supplier Eskom, and South Africa national transportation company Transnet, have convened interdepartmental task team meetings.
The new plant design will use a blast furnace process in production, which is the most similar to Arcelormittal South Africa (AMSA), which also has a capacity of five million tons. In the first half of 2015, South African steel production reached 3.2 million tons, and 70% of it came from AMSA.
Kruyswijk is confident that the new steel mill would beat AMSA in many ways including the procurement of raw materials, energy costs, product quality and diversity.
Because of the logistics roadblocks, placing the steel mill near the raw materials or a port was considered by IDC and HBIS. Kruyswijk says Middleburg and Richards Bay are on the shortlist at this stage.
Pumi Motsoahae, CEO of the Richards Bay Industrial Development Zone (RBIDZ), confirmed that RBIDZ has been speaking to HBIS on a regular basis since the beginning of 2015. “HBIS has inquired about electricity and water supply in the RBIDZ,” said Motsoahae, but he could not confirm the final decision. “It will either be announced at the FOCAC summit by the end of 2015 or after the feasibility study is done.” Motsoahae declined to comment on the competition with Middleburg but he said RBIDZ was exploring alternative energy sources to Eskom.
The iron and steel industry is acknowledged as one of the most energy intensive industrial sub-sectors. Power supply is mentioned by Kruyswijk when he compares the merits of RBIDZ and Middleburg. The new steel plant is designed to ensure low energy costs.
"The energy efficiency throughout the plant is very crucial," says Kruyswijk, who hopes the new mill could fully recover and recycle all the heat and energy. "Even one percentage point energy cost decline will make a big difference to the overall production costs."
Kruyswijk also disclosed that the new plant would use the most advanced rolling mills to reduce the amount of scrap in production.
Not only the siting and design are set to be the most cost effective, the new steel mill is also expected to address evolving customer requirements. When completed, the new mill will be the only one in Africa capable of producing wind tower parts that are big enough. In addition, “the DTI feels strongly that rail products should be included,” says Kruyswijk.
Kruyswijk revealed that HBIS was also considering building an industrial park to host downstream enterprises. HBIS acquired a steel processing plant in Saldanha Bay in 2015 from the Swiss steel trader Duferco.
"IDC encourages competition. The intention is never to create a monopoly nor favour one or two companies," said Kruyswijk.
Kruyswijk warned that the local companies must streamline their productions, "Because the new steel mill will be a low cost producer,” implying local manufacturers will have to give up some market share. He suggested local manufacturers develop more unique products.
Take the price of corrosion resistance plates for example, of the same thickness, it is ZAR6,000 per ton in China, but ZAR24,479 per ton in SA.
According to AMSA, who actively promotes anti-dumping duties on Chinese imports, the Chinese price (excluding transport) is 29% less than the South African cost of production, and the Gauteng landed price of Chinese product is over 13% cheaper than the cost of production in SA.
Kruyswijk expects hostile reactions from the local industry, but he says he is prepared. “They might use the ‘Competition Act’”, he says. The Act was enacted when Singapore Airlines, Unilever and other foreign companies entered South Africa.
The industry association reacted coldly to this new project. The South African Iron and Steel Institute (SAISI) only replied briefly in an e-mail: "Note that the South African Iron and Steel Institute (SAISI) is not involved in this matter." SAISI also enclosed four of its members’ 2014 financial reports which were all in red. The fifth one is not a listed company.
The SAISI’s members are: AMSA, Columbus Stainless (Acerinox), Evraz Highveld, Scaw Metals and Cape Gate.
“These are challenging times for the South African primary steel industry and for the country as a whole. The rising cost of inputs was making it difficult to compete with imports of steel from China as China has dramatically increased global exports of surplus steel in the past couple of years,” replied SAISI.
Kruyswijk adds that the local producers are in such deep trouble that the IDC chose to build a new plant than to take over the old plants. This was also due to the concerning environmental complications around the old plants. “Domestically, slow implementation of the large infrastructure development projects, and protracted mining, metals and engineering strikes have put severe pressure on the primary steel industry,” added SAISI.
Local companies have actively adapted to the changes brought forth by the economic slowdown. “New and evolving customer requirements that are being proactively addressed include more lightweight, high-strength products and lead-free free-cutting steel,” wrote SAISI. “In the automotive sector appropriate steel grades are being developed or improved to satisfy the trend from micro-alloy steels back to heat-treatable steels and the food and beverage industry’s growing requirement for lead-free steels are addressed.”
One of the South African scrap metal suppliers pointed out that steelmakers in South Africa are aware of the necessity of innovative technologies and state of the art equipment in order to enhance their global competitiveness, overcome power shortages and obsolete machinery, yet the private sector cannot afford to invest because of the bleak steel market outlook.
Trade protectionism has gained more ground. South Africa imposed a 10% tariff from December 2015 on imported steel products to save the dying steel industry battered by low-price imports.
Relocating Chinese production
China's crude steel production fell in 2015 for the first time in 20 years. According to the China Iron and Steel Industry Association, Chinese steelmakers made a loss of ZAR50 billion in the first half of 2015, and are indebted as much as ZAR6 trillion in loans. According to the World Steel Association, exports are China’s only hope, and Africa is the preferred destination as it is expected to maintain exceptionally steady growth.
This is motivated by huge infrastructure investment promises made to Africa by emerging giants like China and India. In October 2015, China pledged ZAR700 billion industrialisation loans to South Africa during Vice Minister of Commerce Zhang Xiangchen’s visit to South Africa.
However, Africa’s market size remains the smallest in the world at only 40.9 million tons in 2016, which is less than HBIS’s 2014 output alone. Moreover, trade barriers have been set up to prevent cheap Chinese imports.
Another concern is profitability. Local producers warned that the IDC’s mandate was to create jobs, not pursue profit. But as an investment, the steel mill must deliver profit to survive. To do so, the new plant must sort out its power supply, logistics and qualified manpower.
Three years and waiting
There is a reason why the steel mill plan has remained on the IDC’s table for seven years.
A source close to HBIS speculated that this investment was mainly made to meet the Chinese government’s productivity relocation target. “HBIS is hoping to get government funding and preferential policies from both the Chinese side and South African side for this key project.”
Profitability is essential to the new plant as half of the budget is designed to come from bank loans, while the other half is to come from equity investments.
“We have spoken to all major Chinese financial institutions,” said Kruyswijk in 2015. “I do not feel any limitation from the financiers because both the Chinese central government and the provincial government is very supportive of HBIS’s overseas investment”.
It has been three years since the signing ceremony, yet this US$4.5 billion project, the largest Chinese overseas steel plant investment ever, is still in the “discussion, investigation and negotiation” phase.