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Bold, decisive and urgent reform needed to save the steel sector

Last week a lot has been reported into assessing the likely impact the potential closure of ArcelorMittal SA’s operations in Newcastle and Vereeniging, as well as ArcelorMittal Rail and Structural will have on the South African economy. A number of alarming outcomes are emerging which all point to the fact that the country cannot allow this scenario to play out. Bold and aggressive reform even at the localised level are now, more than ever, urgently needed.

What is not disputed is the extent to which the steel sector is integrated into the South African economy. This point although quite obvious only hits home when the country is faced with the prospect of losing this critical asset of the economy. The long steel products that are at risk feed into the construction, heavy engineering, railways, automotive sector, fasteners manufacturing, mining sector and the structural steel sections required for the electricity transmission sector. The reach is vast, the consequences dire and the cost immeasurable. Downstream businesses that are predominately reliant on supply from AMSA would also be irrevocably affected by this closure.

Some of the most alarming initial estimates relate to the employment losses to the wider economy. The estimates for the first order and immediate impact are in the order of 20 000 to 25 000 jobs, while the longer-term impact of second round effects is likely to be multiples of more than this. The automotive sector has been reporting the adverse local content implications of this development, which amounts to another second order proxy for local economic activity and jobs. Logistics costs, including longer lead times, exchange rate provisioning, are likely to add anything between 20% to 30% to the cost base and the domestic logistics challenges will only serve to compound onto this rendering domestic manufacturing uncompetitive and infusing higher costs into the economy.

The extensive reach of the steel sector across the economy and the number of affected products will induce inflationary pressures to the economy which opens up interest rate considerations its wider transmission mechanism through the entire economy. Moreover, once this domestic capacity is lost to import channels, which will invariably entrench, a considerable segment of the country’s industrial sector will be lost permanently.

The reality is that this localised development will have country-wide, immediate and long-term implications. What is urgently needed are bold reforms at the localised level to prevent these scenarios from playing out. All options, including Negotiated Price Agreements (NPA’s) for electricity, special dispensation and dedicated rail capacity and a levelling of the playing field with regard to the uplifting of the scrap metal ban and in the long-term exploring options for preferential pricing on iron-ore, amongst others, should be tabled and critically explored in a rational and collaborative fashion.  Not to do so, would at best be irresponsible and at worse amount to economic suicide.

Organised business and industry bodies including the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) are willing to stay the course and participate in urgent efforts in averting an economic disaster of unimaginable proportions.

The undeniable fact is that a lot of the levers to ensure that this scenario does not play out are in the hands of the government. We call on government to stand and make these bold and aggressive reforms both at the localised and national level. South Africa’s steel industry must be saved.

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