The Big Read Covid gives SA steel a shot in the arm

Global demand and infrastructure rollout drive sector recovery

● The South African steel sector may not be shooting the lights out but it is in its best position in at least a decade from a supply and potential demand perspective, thanks to a confluence of global and local factors.

Demand for steel around the world is steadily improving as markets recover from lockdown restrictions, and the supply chain disruptions which resulted in shortages of the metal have supported prices and production.

SA’s planned multibillion-rand infrastructure rollout and other public projects have the potential to provide a significant boost to the industry’s fortunes in the next few years.

Charles Dednam, secretary-general of the South African Iron and Steel Institute, says he is optimistic about the prospects for the industry.

“The steel industry is in a healthy and very good position, possibly the best it has been in for the last decade,” says Dednam, who has more than 40 years’ experience in the sector.

Rewind a few years and the country’s steel producers were battling due to a struggling economy, with several well-known names such as Cisco Steel and Evraz Highveld Steel & Vanadium being forced into business rescue.

Dednam says the picture has changed for the better with the pandemic and resultant shortages ultimately working in the market’s favour.

He says the total crude steel production in SA is on average about 400,000 tons a month and is “more or less back at the levels the country was at before the Covid pandemic started”.

“Steel availability in South Africa is probably the best we’ve had in a very long time, following the shortages created by Covid.”

The lockdowns around the world created supply chain crunches as economies started reducing restrictions, resulting in a lot of pent-up demand for steel.

“This helped production catch up and because of the shortage of steel due to supply chain constraints, import orders started increasing, albeit with a long lead time given this was a global issue.”

Dednam says international steel pricing has contributed “quite a lot to the welfare of the steel mills in general”.

“What helped them were the backlogs around the world which created a shortfall in supply and that also helped them to push up prices to some extent.”

He says that last year, hot rolled steel coil prices rose to more than $1,000 (more than R15,000) a ton and though this had dropped back down to $800-$900, expectations were that prices would again start moving upwards. Dednam says that as it now stands, SA has a total steel-making capability of about 8.5Mt a year, with the potential to increase this to more than 9Mt. Demand for steel last year saw about 4.5Mt of this potential realised. Taking into account that about 25% of steel is imported into SA, local steel mills probably produced in the region of 3.6Mt.

He says demand is picking up. “We expect to see 5.2Mt realised this year and that is quite a nice number, so we will see better demand this year. It may not be spectacular but it is definitely better than last year.”

Other factors that should help fuel demand are in place. Investec economist Lara Hodes says global manufacturing remains robust, with the JPMorgan global PMI index in expansionary territory in December. This is “supportive of industrial metals” such as steel and iron.

Dednam says that China cutting back on its total steel production as its construction boom softens is expected to offer further support to SA and other producers, whose mills could pick up the shortfall.

Another key reason China is cutting production is global pressure to curb pollution as the steel sector produces 10%-20% of China’s carbon emissions, he says.

Locally, Dednam says though not much is happening yet with the government’s planned new infrastructure projects, when they do get off the ground they have the potential to give the market a significant boost.

And while the market waits for this, there are a “lot of projects in the housing market happening, a lot of projects in the light manufacturing areas”.

“I see some of the infrastructure is being fixed and we have seen some road projects. Projects such as the Durban port expansion are also happening. There is still a lot more to do. I don’t see any fireworks going forward, but I see a steady pick-up in demand.”

He says the renewable energy sector is also expected to be a source of development in the years ahead.

Azar Jammine, chief economist and director at Econometrix, says that “with a couple of provisos” he agrees that the steel sector is in a much better position now than it has been for years and that the government’s infrastructure rollout, if it gathers momentum, could provide another big boost.

“The first thing is that of course the iron and steel industry, from an export point of view, has benefited a lot in the last year or two from the boom in commodity prices. We are in a far better situation from an export point of view than previously. Secondly, in a way one can argue that the worst is over and that things cannot possibly get any worse in South Africa in terms of demand for iron and steel than they have been in the last couple of years.”

For Jammine, the “big issue” is the planned infrastructure rollout by the government.

“No question there is a big pipeline and there have been two announcements regarding infrastructure projects. The first was in October 2020 when President Cyril Ramaphosa publicised his economic recovery and reconstruction programme, which incorporated a programme of 51 infrastructure projects worth R340bn. The second was announced in the medium-term budget policy statement in November where it was suggested there was a further programme of 56 extra projects worth R559bn.

“If you add the two together you are talking about infrastructure projects worth R900bn. That is going to be spread out over a number of years but that gives you the order of magnitude of what actually can be achieved if these projects that have been planned together with the private sector do materialise. The big proviso is, will they see the light of day?”

Jammine says only a few of these projects have so far got going and he is concerned that with the ANC’s national elective conference taking place later this year there may be too much of a focus by the government on politics rather than on getting the infrastructure projects off the ground.

Infrastructure projects worth R900bn … The big proviso is, will they see the light of day?

Azar Jammine

Econometrix chief economist