Cheap coal and electricity give South Africa a head start as the steel industry rallies from a domestic slow-down and new projects come on line, writes CIARAN RYAN|
GDP's engine shows its mettle
THE SA steel industry is showing signs of turning the corner, having just weathered one of its most testing periods in nearly three decades.
For producers such as Iscor, which is heavily dependent on domestic demand, weakness in the international market was aggravated by a domestic slow-down.
Steel - in its various forms - is a major contributor to gross domestic product and exports. Through the multiplier effect, it is a mainstay of the manufacturing sector and a major source of jobs.
There has been a concerted push in recent years to move SA steel and mineral processing up the value-added chain and reduce its exposure to primary commodity production. Large investments have been made in the Alusaf aluminium smelter at Richards Bay, at Columbus Stainless Steel and at Iscor's R6.8-billion Saldanha steel mill, as well as upgrades at its Vanderbijlpark and Newcastle mills.
Unlike Alusaf, whose commissioning coincided with a strong recovery in the aluminium price, Columbus's baptism has been fraught with snags, not least of which is an international price - about $1 600 a ton - roughly half its level of 18 months ago, and skyrocketing prices for nickel, a major input in stainless steel.
At a recent presentation of results to analysts, Columbus chief executive Fred Boshoff said questions had been raised as to whether South Africa should be involved in stainless steel production at all, but pointed to the successes of value-added stainless steel producers in automotive components and tank containers as evidence of the industry's growth potential.
Losses continue to pile up at Columbus as it rides out a weak commodity cycle, accompanied by the addition of new capacity in Taiwan and Korea. The oversupply position is likely to impede price improvement, but growth in demand should be capable of absorbing excess supplies in 1998.
There have been criticisms of the quality of Columbus's steel, although customers say this has improved substantially over the last year. Though well short of planned plant capacity, Columbus improved production for the six months to June 1997 by 21% to 138 300 tons, with an improved product mix. Analysts expect a recovery in stainless steel prices by 1999, by which time Columbus should surge into profits.
Bloodletting in the stainless steel market had a knock-on effect on ferrochrome producers such as Samancor, which has a one-third share in Columbus along with Highveld and the Industrial Development Corporation. Samancor's share price tumbled 4 000c in recent weeks, down from its 1996 peak of 6 600c. Manganese and chrome prices are a function of global demand for steel, now showing faint signs of recovery after several torrid years. A strong recovery in ferromanganese prices in the near future is unlikely, as this could attract high cost marginal plants back into production.
Presenting Highveld Steel and Vanadium's interim results earlier this month, the company's chairman, Les Boyd, said world crude steel production for 1997 was estimated at 782-million tons, which would be the second best year on record, almost equalling the 1989 production of 786-million tons. World production in the first half of 1997 was 5.4% higher than the same period in 1996.
"Prices on the international market have, nevertheless, remained weak," said Boyd. "The excessive inventory which existed last year has, in the main, been corrected and may lead to some improvement in prices toward year end. On the domestic market sales have been at satisfactory levels."
The International Iron and Steel Institute forecast in April that world steel consumption in 1997 would rise by 2.8%, against 2.7% growth in 1996.
Several new steel projects, either planned or under way, will position southern Africa as a global force in the steel market. A $131-million joint venture between Swiss company Duferco and the Industrial Development Corporation is aimed at turning out 610 000 tons of cold-rolled steel, fed from Saldanha Steel a year. There is also talk of a R100-million tube and pipe mill to supply the Pande and Kudu gas fields, as well as Sasol and Mossgas.
The IDC is also looking at a R5.2-billion direct iron reduction plant, capable of producing about 4-million tons of iron carbide for export. Sites under consideration are Phalaborwa and Maputo, fed by gas from Pande and magnetite from Palaborwa Mining Company and Foskor. A final decision is expected within a few weeks. Earlier this year Gencor gave the go-ahead for a new aluminium smelter in Maputo.
Steel producers are confident of a strong market recovery before the end of the decade and the search is on for locations which provide competitive advantages. South Africa has cheap coal and electricity, two major cost components in steel manufacture, as well as port capacity to handle large export volumes.
South Africa remains trapped at the lower end of the value-added chain, exporting primary or semi-processed steel to more developed countries where it is turned into something more valuable and then re-exported. The scale of new investment in steel and aluminium smelters, as well as downstream production, suggests this dependence on primary commodity output may at last be weakening.