The Minister of Trade, Industry and Competition, Ebrahim Patel, along with industry stakeholders from the steel and metal fabrication sector signed a Master Plan for the sector on Friday 11 June 2021.
The South African Steel and Metal Fabrication Master Plan 1.0
SUPPORT FOR THE STEEL VALUE CHAIN
towards full-scale industrialisation and inclusive growth the dtic Customer Contact Centre: 0861 843 384 Website: www.thedtic.gov.za
SUPPORT FOR THE STEEL MASTERPLAN The following government, industry and labour representatives commit as workstream leads to work with all social partners towards the Master Plan outcomes
Name
Designation
Signature
Ebrahim Patel Minister
Department of Trade, Industry and Competition
Irvin Jim General Secretary
Numsa
Marius Croukamp Deputy General Secretary Solidarity
Kobus Verster CEO Arcelor Mittal SA Supply-side
Freddy Mugeri CEO Fabchem Mining
Demand-side
Elias Monage CEO Afika Power
African Continental Free Trade Area Agreement
Johan Strydom CEO Columbus Stainless Steel
Resource Mobilisation
Nonhlanhla Ngwenya MD MphoNo Energies
Human Resources
Tumi Tsehlo CEO Dynamic Fluid Control
Transformation
Portia Derby Group CEO
Transnet
STATUS OF THE DOCUMENT This document consolidates the comments received from the steel and steel products industry and stakeholders in government on the first draft of the Steel Master Plan. The first draft, which was circulated for comment on 6 October 2020, was the outcome of discussions held between industry stakeholders and government facilitators. This document incorporates feedback received from industry and specific public entities. The Minister convened the first Steel Oversight Council to table this revised document and consider an implementation road-map. The Implementation Plan covers the immediate priorities from the base document, setting out the areas of focus within the first six months, the first year, and the first three years. This Master Plan will guide the stabilization and progress of the industry. It is a dynamic document, hence it is called version 1.0, and it is expected that changes will be made when necessary following discussion at the Steel Oversight Council. Such changes will aim to take account of the developments in the industry, including internal and the external factors which affect the industry.
CHAPTER 1
2 The South African Steel and Metal Fabrication Master Plan 1.0
1. INTRODUCTION TO THE STEEL MASTER PLAN This Master Plan has been prepared to support and anchor the implementation of the Re-imagined Industry Strategy and the Reconstruction and Recovery Plan launched by the President in October 2020. A large number of interactions have taken place with the industry, including both employers and unions, with economists and researchers, State-Owned Enterprises and many others. There is a large amount of research backing the Master Plan, but it is not included in this document. The Master Plan seeks solutions rather than reiterating the well-known problems. This Master Plan builds on the excellent work and proposed measures by the Steel Task Team in 2016, but sets out mechanisms to accelerate and make the previous measures more effective to achieve the desired impact. The key thrust is of this Master Plan is collaborative effort between the social partners, focused on fast-tracking implementation and assisting government institutions to be more agile and responsive. In designing the Plan, it was therefore important to bring all key stakeholders to build consensus on a policy that can drive towards a competitive, dynamic and inclusive industry and which is able to provide a stable platform for investment, growth and job creation. Therefore, a dual process has been adopted, i.e. to finalise and sign-off on the Master Plan and its future iterations while continuing to sharpen the implementation of the on-going support measures afforded to the industry, set out elsewhere in the document. 1.1 WHY THE STEEL MASTER PLAN 1.0? The Steel Master Plan 1.0 represents a consolidation of feedback from the industry, labour and regulators. Gaps identified in the initial draft have been addressed. Government is mindful of the need to build a broad consensus on measures to rebuild the entire value chain, which is highly fragmented, has many sectorally- distinct interests, and could therefore take some time to rebuild. In view of the need to move with speed, the approach adopted is to have this Master Plan in place (hence the name, Steel Master Plan 1.0) and to continually review, adapt and adjust based on the experience gleaned from implementation. Smaller changes may result in new iterations of the Plan (e.g. Steel Master Plan 1.1), while major changes may with time require significant resets of targets or level of ambition as the industry develops and conditions change, resulting in a Steel Master Plan 2.0. Note, however, that the Steel Master Plan 1.0 is already intended to establish a stable and predictable trajectory for the industry, so that businesses and investors can invest with confidence in building up production capacity, innovation, skills and expertise. The Steel Master Plan is not intended to be principally a detailed analysis document of the state of the industry. It is rather a focused set of practical steps which must be implemented on a consistent basis. The emphasis in the Master Plan is therefore on concrete commitments by each of the major stakeholders: investors/manufacturers throughout the different steel and engineering value-chains; organized labour; supplier and customer industries; and public sector entities. As implementation takes place, adjustments will be considered, based on experience. Constituencies are requested to identify additional commitments they are able to make. In particular, the current version of the Steel Master Plan requires firmer and clearer undertakings by firms, investors and organised labour. The commitments by government and public entities will depend on a balanced package of measures in which each social partner brings additional resources to the Plan, in order to change the direction of the industry. Commitments will be included in the implementation plan, with specific dates and resource commitments. More detailed sub-sector actions will also be developed during this second phase. 1.2 BROAD CONSENSUS ON THE NUANCE AND DIRECTION OF PLAN There is common agreement that that the recovery and growth of the industry requires long-term thinking. The industry is now in survival mode and so focuses on cost cutting. Urgent measures are required to give the industry a breathing space and to ensure its survival. Although the industry is in crisis, there is investment taking place. It is the view of a number of investors that because of the significant excess capacity in both the upstream and downstream industries, the investment is limited and is like to continue to be muted until demand increases and there is consolidation in the industry. Most of the investment appears to be taking place in two areas: production of primary steel products (including direct reduction iron and pig iron) and downstream processing to replace higher value-added imports, particularly in the wire industry. It appears that family-owned or privately-held companies are more inclined to invest at this time than those which are owned by institutional investors, which tend to have a short-term view.
3 The South African Steel and Metal Fabrication Master Plan 1.0
However, steelmaking and the downstream production of value-added products from steel are not short-term activities: they require long-term investment and some predictability for the industry. The decision to break up Iscor was based on short-term thinking: integrated production of steel is essential for its viability and it is not unreasonable to hope that the suppliers of ore, coal and other inputs would be receptive to participating in integrated steel production. Revitalizing investments in the industry must be based on long-term objectives and take into account the environmental considerations and the imminent need to green production processes. The goal of production of green steel by 2050, based perhaps on the hydrogen economy, should be adopted by government and the industry. Funding for the green economy is available on favourable terms and should be seen as a key component of the way forward for the steel industry. This will apply equally to foundries and smelters, who will increasingly come under pressure from their customers (such as the international auto industry OEMs) to be green. Long-term objectives are essential to transform the industry too. Helping Black investors to buy into failing companies which require large capital injections to turn them around is not attractive in a market which is not growing. Additional work will be undertaken on detailing opportunities for greening the industry and driving transformation. Already a set of clear opportunities are emerging to restore stability to the industry and to position it for growth. Establishing longer-term investment goals based on the greening of the industry and greater competitiveness, with growing infrastructure projects in South Africa and the African Continental Free Trade Area, will be a more viable path. The key medium-term goal is to match supply to demand: there is over-capacity in basic long steel commodity products, but no supply of many of the steels which are required by the auto industry, the mines and the mining and yellow metal equipment sectors. The steel industry should have a clear goal - to produce some or all of the steel and components which these industries will need to comply with their local production targets. There is widespread agreement in the feedback that supply-side interventions must be implemented more rapidly and effectively than in the past, but that the most important interventions must be to increase demand. The continued loss of domestic and export demand has devastated the industry. The Master Plan identifies some key interventions which can be driven or influenced by the industry.
Key emerging opportunities set out further in this document include:
Growth measures:
• Infrastructure drive: South Africa has a renewed focus on infrastructure, with the establishment of the Infrastructure Fund. The Office of the Presidency is managing the drive directly, providing an important impetus to growth. Discussions are now under way to identify locally-produced products that need to be drawn from suppliers for the new investment. Consensus has been developed at Nedlac in December 2020 that inputs for infrastructure should be manufactured locally. The Steel Master Plan sets out proposals for the effective implementation of localization, which emphasizes the need for the industry to be able to work with Infrastructure South Africa to provide information and options at the design stage of projects and not when it is too late to prevent components being specified which must be imported. Alignment of government infrastructure plans: The Department of Human Settlement is committed to a major expansion of housing and facilities. The DMRE is committed to powering these homes with LPG gas and solar water heating, which creates major opportunities for the domestic steel and steel products industry. The targets set out in the DMRE’s Integrated Resource Plan for powering South Africa should be localized as far as possible and supported by the industry. Similarly, the Road to Rail programme provides both increased efficiency and substantial work opportunities for the industry. • Localisation: South African SOEs like Transnet purchase significant quantities of steel products, such as rails. Transnet has committed to review their requirements and to work with the local industry on building local supply chains for large-scale projects and consumables. In addition, government is working with businesses across the economy, through Nedlac and other platforms, to improve the level and proportion of locally produced goods, including in the hardware and home improvement sector. Discussions have also begun with the mining industry on their procurement, which includes about R20 billion per year of consumables from the steel industry and significantly more on capital projects.
4 The South African Steel and Metal Fabrication Master Plan 1.0
• Export promotion: The African continent represents a significant opportunity for South African steel makers and downstream processors. African countries (excluding South Africa) purchase nearly R400 billion of iron and steel each year and promotion activities must focus on opening these markets for SA steel, while at the same time promoting local partners in those countries. The Master Plan proposes that consideration be given to combined and integrated efforts to promote exports, particularly to the rest of the continent – an approach described as South Africa Inc. These should include export credit insurance, export rebates, consideration of an industry-level fund to support export efforts and greater use of South Africa’s diplomatic relationships. Improved and early intelligence on projects and opportunities in Africa and a sharp focus on the most promising areas (such as agriculture, oil and gas, mining and infrastructure) are critically important. The development of a comprehensive approach to export promotion, especially focusing on SADC and sub-Saharan Africa, is essential for the industry to grow. The development of DFI and venture capital funding to support the development by South African exporters of JVs in Africa will be a critical success factor. SADC and the AfCFTA are a natural market, with some logistical advantages. A forum will be launched with interested parties to discuss the SA Inc approach to export promotion. • The Competition Commission has been consulted in respect of the development of JVs for export promotion: The Commission is in principle in support that aggregation of demand and sharing of information on planned projects should be supported.However, the process to deepen footprints in export markets must be accompanied by measures to protect the availability of products for local customers at competitive prices and to promote domestic industrialisation. In this regard, a possible exemption can be considered to ensure a balanced approach. • Climate resilience and greening of the industry: The green economy also provides opportunities for innovation and the development of new products. There are opportunities in the development of renewable energy, water recycling for a much drier South Africa, desalination, the building of dams, pipelines and reticulation. Green processes in production are likely to become a significant competitive advantage, especially in the export market. The Steel Master Plan proposes that the industry agree to a target for the industry to reach carbon neutrality by 2050, especially for the steel mills, foundries, forges, smelters and other power-intensive processes. This will include the increased use of renewable power, gas replacing coal power, the development of the hydrogen economy, water recycling and the more efficient use of water and waste reduction and recycling (the circular economy). Major gas pipelines are proposed, which will make lower-emission gas available for power and will also create significant work for the industry. • Development of industry value chains: key manufacturing and mining value chains offer an immediate opportunity for growth. The implementation of the Automotive Master Plan will increase the demand for locally produced metal components as OEMs pursue their localization commitments under the plan. Discussions are now underway between the auto industry and steel sector players. In addition, work has begun with the mining industry to optimize procurement of locally produced steel products and engineering services. Sub-sector Master Plans are essential in this industry because of its scope. They should be developed by bringing together the entire supply chain and value chain for the sub-sector. • Reducing the administrative burden on doing business and aligning departmental regulations and incentives: The President’s Economic Recovery Plan has referred to this. The steel industry, more than anything else, needs growth in the economy in order to flourish. Rules and regulations from different departments and levels of government needs to be aligned to ensure on-time and to-cost execution of projects.
Stability measures:
• Establishment of a Steel Industry Development Fund: establishment of a fund to support critical industry projects is proposed, with funding sourced from a small levy on all primary steel sold in South Africa. • Government funding: Government has established a R1.5 billion Downstream Steel Development Fund through the IDC to provide funding to the industry at concessional rates, and address weak balance sheets. In addition, the dtic industrial funding branch is developing a metal fabrication fund. There is a need and an opportunity to optimize these two funds to unlock growth opportunities and to reduce the administrative burden.
5 The South African Steel and Metal Fabrication Master Plan 1.0
• Designation under the Competition Act: Industry consolidation may be necessary along certain parts of the value chain. A targeted designation by the Minister under the Competition Act is proposed, which would enable discussions between industry stakeholders to help manage consolidation. Such designation would require very clear protocols on the objectives of collaboration and information sharing. A consolidation programme directed simply at a managed reduction of capacity (and jobs) may not be in the public interest, whilst one that is directed at securing a higher level of local production and import replacement together with higher efficiencies may offer a public policy benefit that justifies such designation in term of the Act. Some consolidation is likely to take place simply as a result of market forces, but that may lead to further de-industrialisation and a discussion of options is preferable. It is therefore in the public interest as prescribed by Competition law, the scope for exemptions on consolidation should the thoroughly assessed on a case by case basis. The Commission is concerned that certain types of consolidation may have adverse consequences on competition in the long term. For example, aspects of consolidation involving specialisation around different products and geographic markets would extremely be concerning. Such aspects would effectively impose permanent forms of market division on the industry, reducing and not enhancing competition. There is scope for exemptions or mergers on consolidation, and this has to be thoroughly assessed on a case-by-case basis. • Supply of scrap metal: Government has approved an export tax on scrap metal and other measures to help ensure the supply of affordable scrap metal to the domestic consuming industry. In addition, discussions between government and scrap dealers and consumers of scrap have been held to consider measures which can drive local beneficiation of scrap, while supporting the sustainability of the recycling industry. There should be an incentive for recyclers to beneficiate scrap further up the value chain than by simply melting it into ingots or billets for immediate export. • Consideration of input costs: Discussions with key suppliers to the industry (including for instance ore, coal, rail, electricity, scrap as well as the cost of capital etc.) are essential to improve the competitiveness of the industry. It is proposed in this Master Plan that a coordinated effort at reviewing input costs be undertaken, with the dtic bringing key parties together. • Improving intelligence and information: Information about production, costs, prices, margins and demand need to be collected to ensure the effective allocation of resources and support. Technical and research support to the Steel Oversight Council will be tasked with collating information on the industry. Work is beginning in key value chains to digitize production and demand information, to allow better inventory management and tracking and reporting of localization. • Capacitating and aligning key institutions: A number of agencies and institutions play an important role in supporting the steel industry. These include the SABS, NRCS, ITAC, SARS and the IDC. A strategic, industry-focused approach is being developed to ensure key agencies have the capacity to provide world-class service and support. The establishment of industry standards and the ability to deal with illegal and sub-standard imports are critical to the success of the industry. Further opportunities will be developed and implemented as the first phase of the plan has been implemented and as outcomes are evaluated. Some immediate steps have been taken already in anticipation of the Steel Master Plan, as interim measures. These include amendments to the regulations on scrap metal, following an initial restriction on exports, to ensure an affordable supply to local industry; and tariff adjustments for both primary and downstream steel products. The Master Plan builds on these and by setting out commitments from the industry, it provides a coherent and coordinated framework. The responses to the draft Master Plan show that the major stakeholders have already committed themselves to supporting the Steel Master Plan process and many of the institutional building blocks are falling into place. The Steel Oversight Council must build on this to recreate the confidence in the industry which is indispensable for it to grow and prosper.
6 The South African Steel and Metal Fabrication Master Plan 1.0
2. OVERVIEW AND STATUS OF THE INDUSTRY
South Africa is one of the largest steel producers on the African continent. According to the World Steel Association, South African steel manufacturers produced 5.7 million metric tons of crude steel in 2019, second only to Egypt on the continent. 2.1 SNAPSHOT: INDUSTRY PERFORMANCE The Steel Industry Value Chain
7 The South African Steel and Metal Fabrication Master Plan 1.0
Loss of employment in the industry
Exports by HS code
Average tonnes / month
Average tonnes / month
Articles of Iron or Steel
% growth
2019 vs 2018
2019q4 vs 2018q4
HS Code Product
2017 2018 2019 4 620 5 667 7 557 2 115 2 258 1 905
2017q4 2018q4 2019q4 5 551 5 905 6 087 2 968 1 953 1 885
7217 Drawn wire - carbon steel
33.4% 3.1% -15.6% -3.5% -4.6% 9.1% 2.0% 27.3% -30.4% 13.4% -36.9% -27.2% 50.9% 60.0% 12.3% -1.1% 6.1% 4.8% -28.2% -74.5% -20.9% -46.7% 223.3% -44.3% -29.2% -6.6% -20.5% -61.8% 12.6% 15.6% 12.6% 15.6% -2.3% -12.5% -2.3% -12.5% -14.3% -50.8% -5.9% 44.9% 31.3% 352.5% -22.4% -31.6% -26.4% 15.6% 27.9% 19.2% 19.9% 5.7% -11.0% -29.9% -8.4% -23.0% -5.9% -25.6%
7312 Wire rope & cables
7326 Articles of wire, forged products & other articles9 976 9 618 9 177 11 084 10 482 11 433
7315 Chains & parts
498 512 522 238 263 183 715 694 438 284 287 433 4 749 4 004 4 498
449 433 257 186 774 670 333 365
551 211 488 584
7320 Springs
7313 Drawn wire - barbed wire 7317 Nails, tacks & staples
7314 Cloth, grill, netting, expanded metal
4 006 4 703 4 649
Wire and Wire products
23 195 23 303 24 713 25 422 24 697 25 888 8 172 14 872 10 672 11 067 18 278 4 660
7304 Tubes & pipes - seamless
7306 Tubes & pipes - welded small dia. 7305 Tubes & pipes - welded large dia.
7 306 6 455 5 108 42 540 1 746 1 458 1 748 1 238
7 414 7 169 3 823 81 2 213 1 233 1 495 1 517 1 417
7307 Tubes & pipes - fittings
Tube & Pipe
16 978 23 615 18 764 20 057 29 177 11 133
7318 Screws, bolts & nuts
1 714 1 986 2 237 1 714 1 986 2 237
1 958 2 335 2 699 1 958 2 335 2 699
Fasteners
11 735 12 534 12 251 12 855 14 652 12 822 11 735 12 534 12 251 12 855 14 652 12 822
7308
Structures, towers, schaffolding, bridges etc.
Structures
7310 Tanks, drums & cans <300L 7302 Railway material excl. rails
1 591 1 878 1 609 146 119 112
1 417 2 665 1 312
149
98 61
142 276
7302 Rails
331
96 126
99
7325 Cast iron products
1 402 1 582 1 227 359 375 276 508 649 830 479 458 549 190 146 130 5 006 5 303 4 859
1 119 1 835 1 255
7311 High pressure containers 7309 Tanks & containers >300L 7323 Kitchen & houshold articles
417 244
282
507 877 1 045
547 529 299 201
559 141
7324 Sanitary ware
Other Total
4 554 6 510 5 012
58 628 66 741 62 824 64 846 77 371 57 554
8 The South African Steel and Metal Fabrication Master Plan 1.0
Investment in the basic iron and steel industry over the past ten years since the World Cup in 2010
Final sales of primary steel to industrial groups
Source: SAISI Sales to Industrial Groups 2018, Group analysis
2.2 PROBLEM STATEMENT: KEY CHALLENGES FACED BY THE INDUSTRY The industry has been a feature of the economic landscape for decades, but in recent years has not been able to adapt to new global trends (with some notable downstream exceptions). Domestic production of steel has declined in volume and its share of GDP has come down. One significant explanation is to be found in the huge expansion of steel production in China, which has increased its share of global steel output and has impacted on steel production in many traditional steel-producing markets. China now supplies a rising share of SA domestic consumption of steel and industry players believe that this has been aggravated by measures taken to exclude Chinese steel from the USA and the EU, which results in pressures to redirect surplus steel to other markets such as South Africa. Other factors include the rising price of electricity - much of South Africa’s metal industry was built on the indefinite availability of cheap power – and the import parity pricing of raw materials such as iron ore, coking coal and chrome ore. Obviously, these assumptions must be reconsidered in thinking about the future of the industry. The decline in both domestic production and demand has presented a challenge to the industry. The industry is largely in survival mode, which means that cost-cutting rather than investment in new technology, new plant and improved processes is dominating the thinking of much of the industry. There is no doubt that the challenge existed before the COVID-19 pandemic, but its effects have been accelerated and made more intense by the pandemic and the lockdowns around the world. The impact of this challenge affects the entire industry, from the primary steel makers to the downstream, value-added industry. Some companies continue to operate profitably and to export successfully, but most are not profitable, have weak balance sheets and are inward-focused rather than outward-looking. Some sectors, such as the foundries, have been affected more than others, such as the wire industry.
9 The South African Steel and Metal Fabrication Master Plan 1.0
There are pockets of success in various sub-sectors, e.g. the wire industry, which produces 40% of South Africa’s steel industry exports (export performance is shown in Annexure A). The dtic export promotion programme should enhance and build on such winners to support a greater export effort. Even with the wire industry that has been able to maintain some export footprint, capacity utilization remains below 60%, having peaked in 2003. The work of the National Foundry Technology Network has shown that foundries have been affected, amongst other factors, by the administrative and cost burdens of compliance with the environmental laws on emissions. The challenge is greater especially where they supply to the auto OEMs, as compliance is unavoidable, both in terms of the law and the need to comply with the international pressures towards green and clean technologies. The requirement for investment in new foundry technology, materials and processes seems unavoidable. The IDC is heavily exposed to the industry and has taken up much of the role of the banks in assisting new ownership or new companies. It has been argued that some of its past investment decisions were focused on individual projects in the absence of a broader strategic focus on the industry. Now that an industry plan is in place, the IDC is committed to aligning its investment activity with the Master Plan and to promoting an industry-focused approach, taking account both of the need for competition and the current over-capacity in sections of the steel industry. The underlying problem is the lack of demand from an economy which has not been growing sufficiently fast. The lack of domestic demand has been aggravated by an increased market share from imports, both of primary steel and of value-added products. The global glut in steel production and the well-financed and coordinated export effort by especially Chinese companies into Africa has also affected the export markets. It is the view of many manufacturers that the South African banks have reduced their appetite for lending to the steel and engineering industry. The cost of capital in South Africa is suggested as a key constraint and has been raised as an issue affecting competitiveness by many companies. The cost of capital in Europe and the USA is lower than in South Africa, which impacts competitiveness and disincentives investment in new enterprises. IDC funding has sought to address this, though in some cases it is more expensive than the banks, because it sources its capital primarily from the banks, which means that its cost of on-lending is higher than that of the banks. The volatility of the exchange rate has also meant that the forex risk has to be priced into international project bids, which affects the competitiveness of these bids.
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The South African Steel and Metal Fabrication Master Plan 1.0
It is reported that South African and international insurance companies have substantially reduced or withdrawn credit insurance for companies in South Africa and withdrawn it for customers in other African countries. This has affected both sales in South Africa and exports into Africa, including SADC, which is a natural market for South African goods. Some companies have invested to make themselves more efficient, to innovate in products and processes and to use the latest technology. However, much of the industry has under-invested in both plant and skills. The lack of demand and volume has led to the shutting down of capacity in the industry and the closure of lines making special steels and other niche products. There has been substantial loss of jobs in the industry. Despite this, much of the industry still has excess capacity and consolidation in the current environment, where the industry is contracting, is viewed by many industrialists to be inevitable. The industry is very fragmented. The consequences are that there are few companies with deep pockets and the industry associations have been weakened and cannot speak for the whole industry on policy matters. There is also a lack of good information about the industry. The adopted government Master Plan processes and methodology are based on a social compact between workers, industry and the government. To develop a social compact with concrete commitments in an industry which is very fragmented, requires that industry associations are rebuilt so that they can provide an effective service to the industry. Measures to support the industry, ranging from tariffs to access to incentives, have had a mixed effect. In some cases, firms are able to point to the positive impact of public measures, but given the challenges the sector faces, a rethink is necessary. In some cases, public policy measures need to be accompanied by clearer reciprocal commitments by industries (business and labour); and in other cases, the state needs to be more agile in monitoring impact and dealing with efforts to circumvent the objectives of the policy measures. ITAC is committed to investigating more closely the effect of tariffs and the compliance with reciprocal commitments. Through the Public Preferential Procurement Framework Act (PPPFA), government has designated a wide range of steel and steel products for local production when procured by government, the SOEs, municipalities and other public bodies. However, there is evidence of evasion of the designations in favour of imported products. The SABS has committed to taking on a key role in checking compliance with localization policies, but will require to substantially increase its capacity and reduce its costs to do this effectively and on the scale required by the infrastructure programme. There are a number of government agencies which play an important role in supporting the industry. Some key institutions are in need of further capacitation: the SA Bureau of Standards is of vital importance for localization, import protection, professionalization of the domestic industry and exports, but has lost some of its technical capacity: this impacts on its international reputation. The National Regulator for Compulsory Standards is another important agency which needs to be operating at optimal levels. Trust and confidence levels between the public and private sector are critical. All sides have legitimate concerns. Trust deficits between government, industry and the unions must be addressed if there is to be an effective social compact to save and grow the industry. Equally important, confidence in the economy must be rebuilt if there is to be investment and growth in the industry and if jobs are to be retained and created. There is uncertainty about input costs and policy. The uncertainty in the cost and security of supply of electricity, in particular, is a deterrent for investment and confidence. The cost and lack of availability of rail and port services is another significant deterrent. The level of equity transformation in the sector is uneven. Low BBBEE points amongst upstream producers has resulted in low BBBEE procurement scorecards for downstream processors. This (and other factors) sometimes result in users of steel and steel products preferring to import through BEE middlemen, who do not add production value but take a margin. It also means that many downstream companies, including Black-owned companies, do not obtain public sector contracts because they are not sufficiently highly-rated on some aspects of the BEE scorecard. Discussions are proceeding with a forum of Black industrialists to develop an effective transformation strategy that avoids unintended consequences and maximises positive impact. Small and medium enterprises in the steel and engineering industry generally are part of the supply chain for larger enterprises and their funding and growth must be seen in that context. Small businesses rarely grow in a vacuum. A strategy to build Black industrialists must be based on a strategy which involves the whole supply chain and takes into account the interdependencies of the large and small enterprises.
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The South African Steel and Metal Fabrication Master Plan 1.0
3. KEY INTERVENTIONS/MEASURES ALREADY IMPLEMENTED TO SUPPORT THE INDUSTRY AND WHICH ARE CONTINUING
3.1 Trade policy and administration support: 3.1.1 Increase in the general rate of customs duty on primary steel products to 10% and safeguard measures on hot rolled coil and plate products. 3.1.2 Tariff increases on a range of downstream products to the maximum bound rates allowed; trade remedies; deployment of rebates where products are not manufactured or additional value is added before export Since July 2015 a total of 50 trade actions have been taken in the sector across the value chain, including: 6 trade remedies: 2 anti-dumping duties; 2 safeguard actions and 2 sunset reviews on anti-dumping duties; 17 tariffs increased; 3 tariffs maintained; 3 tariffs reduced; and 21 rebates provided of which 10 were rebates for tariffs and safeguards. 3.1.3 SARS reference price system developed for steel products to address low-priced imports and inter-agency working group established to tackle illegal imports 3.2 Localisation 3.2.1 The use of procurement by government to boost aggregate demand: • All major steel intensive products are designated under the PPPFA • Undeemed primary steel in the early rounds of designations to encourage beneficiation and the use of locally manufactured primary steel in all key infrastructure programmes 3.2.2 Consensus developed at Nedlac on Buy Local Programme: • Commitment to promote localisation set out in the Nedlac Economic Recovery Plan covering the 2021 implementation of the localisation commitments made by social partners on the identified value-chains, including steel-intensive products for construction, tools and implements, household goods, capital equipment, transport auto, rolling stock and railway lines, based on a set of targets; a set of products; and champions at CEO level.
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The South African Steel and Metal Fabrication Master Plan 1.0
3.2.3 Infrastructure Programme: establishment of Infrastructure SA, providing an important impetus to growth. Ongoing discussions and proposals to localize infrastructure supply chain. This includes the importance of Transnet setting out clear commitments and a roadmap on the procurement of rails for the renewal and maintenance of the railway lines 3.3 Scrap metal interventions 3.3.1 Implemented the Price Preference System (PPS) in 2013 to ensure availability of good quality scrap metals for further processing in the domestic market as a measure to support the steel industry using scrap metal as input and the foundry industry. 3.3.2 Due to the effects of Covid-19 on the availability of scrap metal, a Policy Directive was issued on 3 July 2020 for an interim suspension of scrap metal exports, followed by an investigation of the effectiveness of the PPS. The suspension came to an end on 2 October 2020 and amendments were made to the PPS, which seeks to curtail illegal exports and make quality scrap available to the domestic market. Feedback from industry sources is that the amended PPS of 2 October 2020 has been effective in making affordable quality scrap availability for the domestic consuming industry, addressing most of the concerns raised by industry users of scrap metal. 3.3.3 The longer-term intervention supported by the majority of stakeholders is for an export tax that will be implemented together with an ITAC permit system. The proposed export tax underwent a consultative and parliamentary process and its administration processes are being set up with an expected implementation date of July 2021. 3.4 Covid-19 relief and other financing support measures R200bn Loan Guarantee Scheme, the UIF TERS relief for workers affected by the Lockdown as well as the IDC administered Steel Competitiveness Fund, which provides concessionary funding to the steel industry for plant upgrades, working capital funding and funding to downstream steel industries which are in distress due to Covid. 3.5 African Continental Free Trade Area Agreement (AfCFTA) The SA Parliament has ratified the African Continental Free Trade Area Agreement signed by 54 out of 55 African countries, with trading set to start in 2021. The SACU offer and rules of origin on Chapter 72 and 73 iron and steel products has been developed. Tariff offers from partners are being considered. The African continent represents a significant opportunity for steelmakers and manufacturers to enhance investment and trade in steel products with all members of AfCFTA. African countries (excluding South Africa) purchase nearly R400 billion of iron and steel each year. A combined and integrated effort to promote inter-continental trade and investment in the steel sector will enhance growth within the Continent. 3.6 Investment commitments The interactions among leaders from government, business and civil society at the 2018 and 2019 South Africa Investment Conferences generated investment pledges of R664 billion. The 2020 conference announced new investment opportunities of R109 billion. A number of these are direct investments in the steel sector, but several are in sectors like construction and mining, which will generate demand for steel and steel products. The strengths and comparative advantages South Africa offers investors and trade partners is evident in a period of growing African integration through the AfCFTA. As part of the consultations on finalising the Master Plan, a high-level survey of investments in the steel industry was conducted. It indicated projects in the commissioning or construction stage, or where the investment is committed, to total R12,3 billion. Other planned projects, which in most cases are conditional on factors such as stable energy pricing and supply, regulatory permission and increased demand, total between R34 billion to R42 billion.
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The South African Steel and Metal Fabrication Master Plan 1.0
3.7 Company level interventions 3.7.1 The IDC acquired SCAW Metal from the Anglo American Corporation in 2012. The investment was seen as both strategic and defensive, to secure the local supply of steel for infrastructure build programs whilst curbing the pace of de-industrialization. The IDC introduced three Strategic Equity Partners to turn-around the business (1) Scaw Metals involved in steel and steel product manufacturing; (2) Grinding Media SA and (3) Cast Products, producing products for mining, rail and general engineering. 3.7.2 Intervention following Highveld closure – the restart of Highveld under Business Rescue was supported by IDC post-commencement finance, resulting in the structural mill being reopened with 250 workers and a contract Manufacturing Agreement with AMSA to manufacture steel sections and rail products. Given the available water, energy and gas supply, the balance of the Highveld property was converted into an Industrial Park, which currently houses 61 tenants, of which 38 are Black industrialists, employing a total of 1 600 people. The businesses in the Industrial Park conduct business with some 300 contract suppliers. Current interventions under consideration include restarting the four iron processing plants. To this end, Highveld has reached an agreement with SAIL Mining to process chrome into ferrochrome on behalf of SAIL, which will utilise one of the iron plants. The dtic participated in the Mapochs merger, resulting in the Competition Tribunal placing a condition on the buyers of Mapochs to supply vanadium ore to Highveld and other beneficiators who do not have resources; this intervention will see the restart of the second iron plant at Highveld. 3.8 Flat Steel pricing Agreement on a set of principles for flat steel pricing in SA that is priced appropriately to ensure that steel- dependent industries are competitive, while at the same time ensuring that the upstream steel mills remain sustainable. The pricing agreement signed in 2017 includes a commitment by the primary steel producer to price flat steel according to agreed principles, which include a methodology termed the “basket price” which excludes China and Russia but includes other steel-producing countries in the following ratio: 50% EU, 30% Asia and 20% NAFTA. The pricing principles replace import parity pricing, prescribing that in effect duties and safeguards are not added to the basket price. Since 2017, the domestic steel hot rolled coil price, which is periodically reviewed by the ITAC Steel Committee, is reported to have been within 1-5% of the basket price. Covid-19 highlighted the risk and challenges of a single flat steel producer in South Africa which was unable to supply all of the demand in the domestic market when production restarted. Against this background, two steel producers have signaled their intention to produce flat products. 3.9 Electricity Pricing Support The DMRE has approved the revised short term and long term frameworks for negotiated pricing agreements (NPAs) for energy intensive users, which set out the criteria for NERSA to evaluate, approve and monitor NPAs. The evaluation of NPAs at inception is based on the cost of supply. Direct Eskom customers can apply to Eskom and municipal customers apply through the municipal licensee, subject to certain criteria. Short Term Framework (STF): The STF aims to provide qualifying consumers with access to electricity prices that are lower than would otherwise be available to such consumers, for a period of up to 36 months, with an option to extend after review. Long Term Framework (LTF): The long-term NPA framework is targeted at large industrial operations that contribute to the base load electricity consumption and economic well-being of South Africa and require electricity price certainty for their operations. The intention is to provide qualifying consumers with access to a lower tariff for a period of up to 10 years, as the operation / sector would be unsustainable on the applicable standard tariff. The base incentive price may be a flat tariff throughout the year with no time-of- use or seasonal differentiation if the applicant can provide interruptibility that the system operator can utilise, within contractual limits, when the system is constrained.
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The South African Steel and Metal Fabrication Master Plan 1.0
4. OBJECTIVES OF THE MASTER PLAN
The Master Plan focuses on the short-term survival of the industry and builds on the on-going support measures outlines above for the longer-term growth and sustainability of the industry. The Master Plan is intended to create long-term policy certainty for the industry. That has been a major reason for the success of the auto industry’s master plan. Predictability of demand, costs and policy, as well as cost competitiveness, are key to re-creating investment and confidence. Besides policy certainty and input costs, the industry will have to re-orientate itself towards the green industry future in respect of the challenges of input and environmental issues – lower emissions, more efficient use of water and electricity - and the opportunities for new industries and new products. This will be complemented by more agile government trade and industrial policy measures. 4.1 GOVERNANCE The implementation of the Master Plan is a collective responsibility of all social partners and will be overseen by the Steel Oversight Council, on which the industry, the unions and the government are represented. The Council will be chaired at a senior level (the Minister or his high-level nominee, as is the case with the other industry Master Plans) and include industry CEOs, labour leaders and senior government representatives. 4.2 FOCUS AREAS FOR THE MASTER PLAN At this stage, the focus areas are as follows: 1. Monitor implementation of the Steel Master Plan 1.0 and performance of the industry 2. Identify adjustments to the Master Plan where these are warranted by impacts that are different to policy objectives, and make recommendations to Government 3. Make trade measures and incentives more effective and identify reciprocal commitments from industry and labour 4. Help to identify opportunities to boost demand and stimulate local production
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The South African Steel and Metal Fabrication Master Plan 1.0
5. Bring the entire value-chain together in key areas to promote clear objectives. Attention will be given to the full value-chain with greater focus where there is value-addition and larger job multipliers 6. Promote an integrated SA Inc approach: the Master Plan seeks to align with the policies of other government departments (especially the DPE and the DMRE) and take into account important agreements such as the African Continental Free Trade Area and the agreement by the SADC Council of Ministers on the importance of backwards and forwards linkages of the mining industry in the region, which emphasizes local production of mining equipment and supplies. Increasing SA exports require an amplified SA Inc approach. Many countries, for instance, provide a country package to support their exporters, especially in Africa. This approach should be developed in South Africa. The IDC and the dtic are currently working on end-user financing proposals, for instance. Stronger integration of economic measures and diplomacy is required. Inside South Africa, there is a strong argument for a SA Inc approach on a case by case basis. For instance, the narrow cost-benefit balance for an SOE may provide benefits for the SOE at the expense of continued de- industrialisation of the country. There must be a broader view – a SA Inc cost-benefit analysis, which takes into account the current crisis in manufacturing in the country, the fiscal constraints and the longer-term expected strength of the economy. These focus areas will be evaluated and amended as and when necessary by the Steel Oversight Council to ensure that the Master Plan, the associated programmes and implementation platforms are flexible and agile to take advantage of opportunities and timeously react to challenges. 4.3 THE CRUCIAL ROLE OF INFRASTRUCTURE Although many issues are covered in this Master Plan, the recovery of demand in the economy through a large pipeline of infrastructure projects in South Africa and the region is crucial to the health and growth of the industry. It is especially important to develop two or three mega-projects with real economic merit and viability, which will rebuild confidence in the economy. Strong private-sector involvement in the projects can enhance the impact. The announcement of viable and exciting mega-projects together with viable financing and implementation plans, is likely to have an immediate and high impact in restoring confidence, according to industry leaders. A few mega-projects are under consideration and the industry should consider how to work with the government to accelerate them. The historic peaks in the steel consumption trend have coincided with big construction projects, as shown in the graph below.
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The South African Steel and Metal Fabrication Master Plan 1.0
CHAPTER 2
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The South African Steel and Metal Fabrication Master Plan 1.0
5. MAJOR PROGRAMMES The programmes of the Steel Master Plan are divided into three major categories:
Supply-side measures
Demand-side measures
Cross-cutting issues
The emphasis of the Master Plan is on implementation and impact. The Implementation Plan which accompanies this Master Plan identifies key short, medium and long-term deliverables and milestones. These will be considered by the Steel Oversight Council and may from time to time be modified by the Council, based on experience and impact. The programmes listed in these three categories are grouped under twelve headings. This will make it easier for the Steel Oversight Council to construct a dashboard to track the progress in implementing the Master Plan.
The twelve headings are as follows:
SUPPLY-SIDE MEASURES
DEMAND-SIDE MEASURES CROSS-CUTTING MEASURES
1. Input cost reduction in the value chain and availability 2. Establishing industry and product standards 3. R&D, innovation and the fourth industrial revolution for productivity and competitiveness 4. Resource mobilization for investment and stabilization 5. The primary steel industry and steel prices: carbon and stainless steel
7. Infrastructure programme and localisation
11. Industry cohesion and steel industry development fund
8. Import replacement
12. Transformation
9. Product value chains
10. Exports
6. Training and mentoring
Each programme will constitute a work stream. To implement them effectively, business will provide project managers to work with the three partners, business, labour and government. They will report to the Steel Oversight Council. Each work stream must also have a champion from business, labour or government, who will assist the project team to overcome blockages and bottlenecks. The dtic will investigate the feasibility of establishing a specialized Project Management Support Unit which is tasked specifically with the effective implementation of government’s role in the implementation of the Master Plan. Increasing demand remains the most important medium- to long-term objective, which requires the unlocking of effective and productive spending by the government and the private sector on infrastructure and the effective localization of production for these projects, as well as the operationalizing of a steel component of the AfCFTA. However, both supply and demand-side measures are necessary. Many of the supply-side measures will be temporary, to give the industry a breathing space. The industry must therefore increase competitiveness, including moving towards green industry processes, which will be a competitive advantage in markets such as the EU. The Competition Commission supports the Steel Master Plan, noting that there should be a balance of measures to support the competitiveness of the sector against price raising effects and exclusionary practices that may affect the competitiveness of the steel industry and related industries that use steel as an input.
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The South African Steel and Metal Fabrication Master Plan 1.0
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