Steel shortage is ‘industrial sabotage’, causing ‘economic destruction’

A range of flat and long products are in short supply locally and globally from most steel mills. Now questions are raised about how long this shortage will last and how it will impact on government’s infrastructure plan.

“The entire steel value chain is experiencing stoppages, while the cancellation of contracts, severe drops in production and consequent job losses has spilt over to other industries where even small quantities and components of steel hamper the progress of production,” says Gerhard Papenfus, CEO of the National Employers’ Association of South Africa (NEASA).

He predicts that AMSA’s insistence on duties, even when it cannot supply the market, will lead to its eventual demise. He calls the steel giant’s insistence arrogant and delusional and says it amounts to ‘industrial sabotage’.

“AMSA’s promised efforts to mitigate the shortages are simply too little too late. Did they not foresee these shortages? Did they contemplate the devastating impact on the downstream? Why is it necessary for a campaign to alert them to the hardship their inefficiencies are imposing on the downstream? Or do they simply not care,” Papenfus wants to know.

‘Colossal unproductive monopoly’

He says as soon as AMSA convinced government to protect it, “in return for an unknown favour”, the company forfeited the right to not adequately supply the market in terms of product and price. “That is the logical approach. However, logic clearly does not dictate the duties debate.”

Papenfus says he cannot understand why government sympathises with AMSA to the extent that it is prepared to sacrifice the entire steel industry downstream to protect this “colossal unproductive monopoly”. “Why is the Minister not telling us in a short message and in plain words what this is to enable the industry to engage on it? The steel industry downstream waits with bated breath.”

Tami Didiza, group manager: stakeholder engagement and communications at AMSA, says there are increased lead times for the supply from steel mills around the world, with most mills now quoting delivery in the first quarter of 2021 or, for some specific products, even into Q2 of 2021. Similar shortages are experienced in many other industries and AMSA is also battling to receive certain input material.

“AMSA ceased operations at all its blast furnaces as required by the Covid-19-related lockdown regulations and completely stopped production for the first time in the history of the integrated steel industry in the country.”

Addressing backlogs

According to Didiza this resulted in an abrupt disruption of the entire steel supply chain, but the company is “progressively addressing” the problem of temporary backlogs in supply due to almost three months of lockdown-related disrupted production and other temporary production delays caused by external factors”.

He says the lockdown also resulted in depleted inventories at every stage of the supply chain, from AMSA to steel service centres and steel users, below normal operational levels. With increased demand, the market is consuming everything AMSA produces so that supply chains remain depleted.

AMSA initially decided to temporarily idle its second blast furnace at Vanderbijlpark until demand for steel had recovered, Didiza explains. “However, certain short-term factors, such as lockdown-affected construction projects which are now being completed, increased sales at retail outlets and running at lower stock levels in the steel value chain before lockdown resulted in an increase in steel demand at a faster rate than originally anticipated.”

AMSA will restart its second blast furnace at its Vanderbijlpark operations in December 2020 and the maintenance of the Vaal Meltshop was delayed. Didiza says AMSA aims to significantly reduce the temporary supply backlogs during December 2020, which is traditionally a quieter period for the industry.

Steel prices up

The steel prices in global markets have risen by around 15% and in some markets significantly more. Will this shortage lead to higher prices? Didiza says AMSA’s prices for flat products are governed by the fair pricing basket principles agreed with and monitored by government.

Chifipa Mhango, chief economist at the Metals and Engineering Employers’ Association, says most of the shortage is caused by low capacity at plants due to the heavy lockdown restrictions under level five and four.

“Most steel producers decided to reduce production due to insufficient demand. The heavy lockdown in the first two months meant total shutdown of blast furnaces for steel production. As construction activity opened up, stock inventory levels were depleted.

“The wholesale trade sales of construction and building material surged from a low level of R1 billion in April 2020 to a monthly average of R10 billion in August 2020, which also contributed to the current situation as there was limited time to replenish stock.”

Mhango says the shortage is more attributed to low levels of capacity utilisation in the manufacturing sector in general and the basic metals industry specifically. “Total manufacturing sector capacity utilisation is currently at around 73% and the basic metals industry at 64%.”

He also points out that there is concern around implementation of government projects with the steel shortage, but emphasises that several Soccer World Cup 2010-related projects experienced supply disruptions caused by continued load-shedding.

“However, the situation was managed. In the current environment, it is important that government adopts a strict approach in the tender process and adhere to Service Level Agreements. The companies bidding for the planned Government projects should guarantee that they will be able to supply the steel products required.”

Mhango says the shortage cannot be called artificial. “I would say it is a natural, pandemic-driven shortage as no one anticipated the derailing effect Covid-19 would have on business activity, which resulted in total shutdown of the economy.”

For more news your way, download The Citizen’s app for iOS and Android.