Did government policy kill SA’s steel industry?

Now that ArcelorMittal closed down its long steel business after first postponing it for a month to give government the opportunity to step in and help to keep the large steel manufacturer in operation, the question remains: Did government policy kill South Africa’s steel industry?

It seems to be the case, according to a new report from independent economic consultancy Econometrix that deals with the impact of tax policies on South Africa’s steel sector and economy, with the title “Economic impact of tax policies on South Africa’s steel sector and economy”.

According to the Econometrix report, South Africa’s crude steel production steadily declined in terms of volume from a peak of 9.7 million tonnes in 2006 to 4.7 million tonnes in 2024. In 2004, South Africa’s steel industry ranked 20th globally, contributing 0.9% of world crude steel production and producing 57% of Africa’s steel output.

By 2024, South Africa had fallen to 29th place, accounting for 20% of Africa’s steel output and just 0.3% of global production.

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Consequences of declining steel industry output due to government policy

Even worse are the consequences of South Africa’s declining steel output. According to the report the basic iron and steel manufacturing sector’s contribution to gross domestic product (GDP) decreased from 0.8% in 2010 to just 0.3% in 2023.

In line with the decrease, formal employment in the basic iron and steel industry declined sharply over the past 15 years, decreasing by 46% from 50 488 employees in 2009 to just 25 616 in the third quarter of 2024, with 24 872 jobs lost between the third quarter of 2009 and the third quarter of 2024.

According to the report, 7 477 jobs were lost in the past decade after the introduction of the Price Preference System (PPS) tax policy in the fourth quarter of 2014, including the closure of Evraz Highveld Steel in 2015 and ArcelorMittal’s Saldanha plant in 2020. The closure of ArcelorMittal’s Newcastle factory will see another 3 400 job losses.

Another consequence is that reduced steel output lowers export revenue, weakens South Africa’s industrial base and increases dependency on imported steel products, exposing the economy to global market fluctuations.

The steel industry’s decline also undermines infrastructure development, increases costs, delays projects and reduces its contribution to GDP.

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From continental steel industry leader to significant decline

The stagnation in South Africa’s crude steel sales reflects a persistent decline in the steel intensity of the country’s gross domestic product (GDP) since 2006. Historically, South Africa’s steel intensity was higher than the global average before 2007/2008, driven by industrial and infrastructure development, according to the report.

Econometrix found that although South Africa’s steel industry was a continental leader and cornerstone of the country’s industrial base once, it entered a prolonged and significant decline over the past two decades.

“This trend reflects broader patterns of deindustrialisation and stagnation in the manufacturing sector, which have had profound implications for economic growth, employment and regional trade. From its peak in 2006, steel production has almost halved.”

Although South Africa’s steel production decreased, global steel production increased, driven largely by China’s rapid industrialisation and increasing demand. According to the report, local steel production has also been hampered by weak domestic demand, stagnant economic growth and a 50% surge in steel imports since 2018, further weakening the competitiveness of local producers.

Escalating production costs, including higher prices for electricity, labour and essential raw materials like iron ore, also caused additional strain on the sector. And although South Africa is a significant producer of iron ore, logistical inefficiencies and global price fluctuations continue to drive up input costs for steel manufacturers.

Increasing electricity tariffs and the cost of raw materials also increasingly undermined the sector’s competitiveness.

According to the report, another key factor contributing to the global increase compared to South Africa’s decline is that while over 64 countries have implemented protectionist measures, but South Africa remains one of the least protected markets, leaving its steel industry highly vulnerable.

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Two government policy decisions making it difficult for steel producers

Two policies are making it difficult for big steel producers such as ArcelorMittal to operate in South Africa:

• The PPS, introduced in 2013, mandates that scrap metal exporters sell material to local producers at discounted rates, benefitting smaller, scrap-based mini-mills at the expense of primary steel producers like ArcelorMittal.
• The export tax, introduced in 2021, aimed to replace the PPS and limit scrap metal exports but failed to address the broader structural issues, such as rising costs and competition from cheaper imports, especially from China.

The PPS and Export Tax policy had unintended consequences, leading to overcapacity in South Africa’s steel industry. According to the report, the country’s steelmaking capacity of 10.5 million tonnes annually far exceeds domestic demand of just 4.2 million tonnes, with government-supported mini-mills exacerbating the oversupply issue.

The report shows how the introduction of the PPS in 2013 and export tax policies since May 2020 has led to a sustained suppression of South African scrap metal prices, which remained below international levels since 2016.

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Unintended adverse effects of government policy on steel industry

The report concludes that government policies like the PPS and scrap export taxes, designed to protect local producers, had unintended adverse effects as these interventions did not fully address the underlying structural issues at play and instead created market distortions that disproportionately benefit mini mills, negatively affecting traditional steel producers.

Econometrix says in the report that government can address these imbalances by revisiting these policies to support recycling, mini-mills and primary producers equitably, focusing on boosting economic growth, reducing costs, improving efficiency and fostering a competitive recycling and steel sector.

“This includes better support for infrastructure, revising the approach to import competition and promoting downstream activities and export markets. Econometrix’s modelling suggests that abolishing these policies would restore a level playing field, stimulate demand and help the sector regain competitiveness.

“Recalibrating policies is essential for safeguarding the future of the steel industry. The South African steel industry would be better positioned to contribute to economic growth, support job creation, and enhance its role in global markets.”