Ideology stalls recovery of a sector on its knees

South Africa has potentially lost about 1.5-million tonnes of steel production, or 27% of its total output of about 5.5-million tonnes a year.This follows last week’s “temporary” halting of Evraz Highveld Steel & Vanadium output, and the imminent threat of closure at ArcelorMittal SA’s Vereeniging long steel works.

South Africa’s demand for steel is less than five million tonnes a year at present, with the rest stockpiled or exported.

If 1.3 million tonnes a year of cheaper Chinese steel imports are included in the South African demand mix, this means the domestic steel industry, which has a potential annual capacity of 7.5-million tonnes, is flat-lining.

With these developments in a bedrock industrial sector, it may be that South African manufacturing will face an entirely new growth conundrum by the end of next month – when numerous steel industry deadlines need to be met.

The country’s downstream metals sector is reliant on steel production, as much as the government’s R4-trillion infrastructure plan is.

But the desire of the state to use metals production and beneficiation to “re-industrialise” the country – and also to industrialise the southern African region – is paralysed by contradiction.

Ask any large construction company – the construction industry  uses about 50% of total steel production in South Africa – about infrastructure spending by the government and they will reply there is little to none.

Yet, according to official statistics, significant sums of money continue to be spent on infrastructure across all three tiers of government.

Economic Development Minister Ebrahim Patel says this is reflected in such things as the proliferation of solar geysers on the roofs of low-cost houses.

He said recently that social infrastructure spending was taking place on a national scale, much of it in rural areas — and that was why it was difficult to see.

He reiterated a point, now in favour among the ruling elite, that by measuring gross domestic product growth, the available data do not fill the whole economic picture.

All of this is true. But equally, there is little evidence of spending on large infrastructure projects, of the scale seen before the 2010 World Cup.

To this end Patel has conceded the state is still in a planning and cost containment phase, having punished cartels that transgressed competition laws – cement and steel makers and construction companies among them.

The punishment was a necessary shot across the bows to industries used to running business through “parties” and little black books, and dealing out favours.

But where much has gone awry in South Africa is that notions of crime and suitable punishment are too often driven by ideological concerns, and not by objectivity and necessary pragmatism.

For example, the state’s claim that huge margins were gouged out by the construction industry ahead of the 2010 Soccer World Cup must be seen in the context of the urgency of that build process – and in the facts.

So, too, the notion that companies colluded at this time can, from another viewpoint, look like essential scope, planning and engineering consulting work – especially in the context of a build as fast, broad and complex as for the soccer extravaganza.

The truth of the matter is that manufacturing is on its knees, and any idea of a government-driven re-industrialisation process in South Africa through local procurement and the development of black industrialists is just a pipe dream.

The demise of both Evraz and the specialised steel-making arm of ArcelorMittal SA is testimony to the fact that economic reality and policy in South Africa are way out of sync.

The country’s  mining  sector is bleeding jobs, with gold and platinum assets floundering.

The global commodities rout is mainly to blame, but not far behind are violent and protracted labour strikes, endless well-above-inflation wage increases, and Eskom price hikes and power outages.

The government’s Industrial Policy Action Plan has been dealt a hefty blow with the news of the steel market rout.

That means dreams of greater beneficiation of South Africa’s mineral and other commodity resources will remain just that, because the  mining, metals, manufacturing, automotive, energy, farming and construction sectors are deeply interrelated.

Meanwhile, as long as the government uses state procurement as leverage for mandatory black economic empowerment, the costs for industry will continue to mount. Mining, manufacturing, construction and services will not grow while punitive racial policies remain nonnegotiable.

Media reports that both Eskom and South African Airways are demanding suppliers do further empowerment deals if they want to retain their contracts is, in conventional terms, called blackmail – or in South Africa’s case it is “business unusual” in the most negative context.

Imported Chinese steel is up to 25% cheaper than South African-made products.

It looks like large chunks of the domestic steel industry have now been given over to China – just think how much money the government can save on its R4-trillion infrastructure plans.

Mark Allix writes for Business Day