The demise of ArcelorMittal SA’s (Amsa’s) long steel business raises fundamental questions about SA’s primary manufacturing capacity. In recent years we have lost capacity in steel production, oil refinery and chemical production. Our heavy industries appear to be in retreat.
SA has a long history of primary manufacturing. Spurred originally by import substitution industrialisation in the post-war period, we built a formidable industrial base behind tariff barriers. This was possible not only because of trade protection, but because SA had two unique attributes — cheap electricity and extraordinary mineral resources.
Drawing on these advantages we became substantial producers of iron and steel, pulp and paper, chemicals, oil from coal, aluminium and other metals. When tariff barriers tumbled in the late 1990s, many of these producers were able to withstand the onslaught of competition because they had access to minerals and cheap electricity and could rely on a reliable freight and logistics service from Transnet.
We all know what happened to cheap, reliable electricity, freight and logistics. The decimation of Eskom and Transnet have gutted SA’s primary manufacturers. Other pressures also emerged in the form of carbon taxes, declining demand and a poor investment environment.
PRIMARY PRODUCERS
Meanwhile, Sasol faces an existential threat from international policy changes related to the energy transition. The proposed European carbon border adjustment mechanism and other environmental measures are a fundamental challenge to this important SA company. Unless the market for green hydrogen moves far faster than it has in recent years, Sasol’s options will be limited.
Amsa is set to close its long steel operations though a rescue plan might still be hatched. If it does indeed close there will be a terrible knock-on effect on vehicle manufacturing in SA, which relies heavily on Amsa’s output. For the sake of the vehicle sector alone we must hope for a solution.
Amsa’s difficulties are not only related to the emergence of the scrap-based mini-mills, but also to the stagnation of demand. The market for long steel has hardly grown in 30 years because the economy has stagnated for much of that time. If the long-awaited infrastructure boom actually materialises conditions may become more favourable.
However, Amsa’s problems cannot only be laid at the door of the domestic market. A key factor has been the lack of investment in new technology and lack of integration into global supply chains. The economy is too small to serve as a sole market.
SA’s paper producers offer a contrasting — and more hopeful — story. Like metal production, pulp and paper manufacturing is a primary industry, converting a natural resource into a finished product. Such as metal it uses large quantities of electricity and relies on freight and logistics. And yet SA’s two large producers, Sappi and Mondi, have been able to survive the difficulties of the past decade.
These two companies have both become global players and should be recognised as leading SA corporates. Two factors have set them apart. The first is that they are positioned as key suppliers in global supply chains, producing a limited number of products with a wide customer base. They export a substantial portion of their product rather than relying solely on supplying the Southern African market. The second is that they have invested heavily in their plants over a long period, constantly upgrading their technology.
Primary manufacturing is certainly under threat in SA. Huge efforts are already under way to fix Eskom and Transnet, and to roll out infrastructure. This could breathe new life into manufacturing, but it will not be enough. The companies that survive will be those that penetrate export markets and invest in new technology.
The government can be asked to fix energy markets and ports, and to ignite demand. But there is no replacement for industrial leaders that position their companies successfully in global markets and invest accordingly.
• Bethlehem is an economic development specialist and partner at Genesis Analytics. She has worked in the forestry, renewable energy, housing and property sectors as well as in local and national government.
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