Credit insurer Coface South Africa says many of the bigger players were assisted by the demand for hundreds of thousands of tons steel required for Eskom’s new power stations. South African companies have been awarded the largest orders for structural steel in South African history and all this steel is being produced locally.

South Africa also has a significant backlog of infrastructural reinvestment that needs to be addressed. Because of this, sustainability of government’s Infrastructure Roll-Out Programme should last well beyond 2010. Therefore, South African steel producers are not looking at the current economic conditions as a threat to the future of the programme, with the recent drop in prices only alleviating some of the pressures associated with funding.

A further decline in the market is not expected, but current conditions should continue in the foreseeable future, with an improvement towards the end of the first quarter of 2010. Cashflow for many steel suppliers will remain the major issue, with the aim now being survival.

The few companies with the cashflow to carry some capital expenditure for a few months may attempt to position themselves to up their market share, if the market should turn in early 2010. Meanwhile the steel construction industry has doubled its production capacity since 2006 by investing heavily in new production facilities, equipment and materials management systems to the extent that South Africa currently has one of the best equipped and most productive steel industries in the world.

All indicators point towards a recovery in the steel price in 2010. This view is based on projected price increases in the raw materials used in the manufacturing of steel, electricity price increases, and an expected increase in demand for steel from the manufacturing sector.

A global iron-ore price settlement, 10% up on current prices, is expected from price negotiations between the major suppliers and consumers in the near future, with the rest of the world following suit. There are already indications of stockpiling taking place by major steel manufacturers, in anticipation of 2010 price increases.

The global demand for steel fell in the last 12 months. This resulted in a subsequent drop in the demand for coking coal. The most significant growth potential for coal lies in steel manufacturing. Some definite positive signs of an increase in demand for steel are already evident through the subsequent demand for coking coal.

The spot prices of coking coal and thermal coal have increased by 33% and 18% respectively in the last few months, with Eskom’s expected increased consumption also adding to the increase in demand. South Africa’s severe power shortages are likely to continue unless there is significant investment in new power stations with the resulting increase in demand for coal, and the demand for steel to build these power stations.
The biggest local consumer of steel products is the manufacturing sector, with structural steel (used mainly in infrastructure development) being the largest subsector, and building and construction; mining; and automotive sectors being the other major consumers.

The South African manufacturing sector bottomed out in April 2009, and although recovery has been painstakingly slow, there is a definite upward trend with year-on-year production decreases shrinking every month.

Given the delay or suspension of mining projects, necessitated by the current global economic slowdown, it is expected that the mining sector’s steel demand will also increase in 2010 as these projects get back on track.

The greatest threat to a recovery in the South African steel industry is the proposed increase of 35% per year for the next three years in the price of electricity. This will not only have a significant effect on the cost of producing steel, but also affect the production costs of manufacturers of fabricated steel products, and impact on the cashflow and steel consumption of the end-user, which effectively drives the whole industry.
Some inventory build-up to take advantage of the rising prices could also lead to a ‘technical recovery’ in the industry. As was the case in 2009, this ‘recovery’ could stimulate the industry and result in increased production by manufac-turers, but ultimately be short-lived. Should wholesalers and retailers become fully stocked, further orders could die down with the resulting cut in prices due to lack of demand. All stocks held will be devalued overnight and force players to reduce their margins or in severe cases even sell at a loss.

For the SA mining sector, the impact isn’t necessarily obvious to the man in the street, but plummeting consumer confidence in Europe, the US and Asia is already driving down demand for new housing and new cars in those regions. This in turn reduces demand for building materials and automobile components – both made of steel.  European and Japanese steel mills are hurting, and some have temporarily halted production altogether.  Guess where many of these steel mills get their raw materials? South Africa!

 So, no surprise that in the last 4 months, many SA suppliers to the Asian and European steel industry have been hit by a double whammy of falling prices and falling volumes.  One scarcely has to pick up a newspaper to read about yet more production cut backs in local steel-related industries like iron ore, manganese and chrome.  These cut-backs, in turn, have ‘trickle-through’ effects on the regional economies that surround the affected industries.

Simon Davies, Principal South Africa for leading international business consultancy, Partners in Performance, says the situation is not good – and neither is it likely to improve any time soon.  “We’re already seeing major cost reduction programs from mining sector clients in the US and Australia,” he said, “and remember, we in SA have to compete with these guys, so if they’re cutting costs and we’re not…SA industry has to pedal that much harder just to keep up.”

Davies reports that not all sectors of the SA mining industry have been hit as hard as the suppliers to the global steel industry – yet.  “Export coal volumes are still holding up but prices are declining – so SA’s coal producers are probably going to feel a profit pinch at some point in the future,” he says.  The same goes for the platinum industry, where dwindling demand in the automotive industry has had a big effect on platinum mines here in SA.

So what should SA industry do?  According to Davies, the only answer for commodity producers is to cut costs. “I’m not talking about superficial economy drives like making sure the office lights get turned out at night, or buying a cheaper brand of coffee”, he says.  “If you no longer have the benefit of high prices or high production volumes to keep your unit costs down, you have to fundamentally re-think the things that really drive your cost base in the first place – things like productivity, contractors, suppliers, overheads, overtime…and the way you manage them.”

“It’s easier said than done, unfortunately.  Most companies get complacent about productivity drivers and cost discipline when times are good,” Davies said, “and they then lose the ability to manage these things tightly when times get tough.”

And times can change in the blink of an eye, leaving some companies struggling. Davies says: “There’s no point issuing a sudden cut in your budget for overtime if the Foremen who actually control overtime don’t know how to manage the factors that cause it to start with – like poor roster planning, inadequate shift license coverage, high equipment breakdowns, or laxness on absenteeism.”

In another example of poor cost-driver management, Davies points to “overheads creep” and “grade creep” where, in the good times, companies can become complacent about allowing their ratio of overhead staff to operational staff creep up, and/or about allowing the average grade (pay bracket) of overhead staff to climb.  “Fixing overheads is anything but easy if you want to do it properly,” he says.  “Correcting overhead expenses usually takes months of focus and energy if you want to avoid having costs quietly creep back up a short time later.”

That’s why many companies turn to consultants for help where cost reduction is concerned.  Davies says that his firm, Partners in Performance International, is never busier than during an economic downturn.  “I know it’s counter-intuitive,” he said, “but the smart clients know they need help and it’s easy to justify using us when the payback on our fees, in terms of bankable cost savings, can be measured in a matter of weeks.”

Davies believes the message for SA industry is clear – and literally written on the pages of the daily newspapers.  “We’re just starting to see the tip of the iceberg here,” he says.  “Anyone who isn’t seriously managing the fundamentals that drive their big-ticket costs is in for a very hard time – and just choosing a cheaper brand of coffee isn’t going to make any difference.”

Mamelodi Primary is scheduled for completion by the end of the year. The remaining nine schools, one school scheduled for each province and two in the Eastern Cape, will be built over the next seven years depending on guidelines provided by the department of education and economic circumstances. The total value of the schools programme is estimated at R250 million with Mamelodi primary projected to cost R39 million. The schools will be built using steel supplied by ArcelorMittal South Africa.

For ArcelorMittal the Mamelodi project is another crucial pillar in its strategy of investing heavily in skills development, training and education. This strategy includes promoting maths and science skills at high schools; an extensive bursary programme for artisans, engineers and other technical skills; and, upgrading the skills of its own employees.

This investment not only ensures that the company has a pool of skilled resources for its own operations, but also contributes towards addressing the skills shortage in the country in general. Under government’s Jipsa programme ArcelorMittal is one of the companies that has committed itself to producing more artisans than it needs for its own businesses.

The company’s CEO, Nonkululeko Nyembezi-Heita explains:

“Our core business relies heavily the availability of skilled people in the scientific, engineering and  technological sectors as well as artisans. The key pillar of our skills policy – and that of JIPSA – is to align tertiary education and other institutional training with the actual skills required by both the public and private sectors.”

The company’s multi-million rand investment strategy to date has been a successful one and ArcelorMittal South Africa has been recognised as a corporate leader in the field of skills development and training.

The company is particularly proud of its R28 million investment in Science Centres in Sebokeng and Saldanha, adjacent to its Vanderbijlpark and Saldanha operations respectively. The Science Centre in Sebokeng, opened in 2006, has uplifted the level of science, mathematics and English education for over 2000 pupils at 43 schools in Sebokeng. The centre offers pupils access to classrooms, science laboratories, state-of-the-art computer centres and interactive science exhibitions and offers curriculum-linked science and mathematics instruction. It contributed towards a higher-than-average pass rate among matriculants in the area last year. Fifteen successful matriculants have received ArcelorMittal bursaries, including five bursars studying engineering at universities. The Saldanha centre was only opened in December 2008.

Says Nyembezi-Heita: “ArcelorMittal is focused on developing a strong mathematics, science and technology culture amongst schools. The company’s array of education initiatives is geared towards improving education within targeted communities, promoting scientific literacy and enhancing performance at secondary school level in order to benefit the wider economy.

“This investment in primary education in a way completes the circle and we now have a fully integrated education and skills strategy in place upon which we can structure future investments.”

In a first for South Africa, Mamelodi Primary School will be built using insulated panels technology, which relies heavily on steel as a building material.  It can withstand extreme weather conditions, is fire resistant and ten times faster to erect than using conventional building technologies.