Economic Watch

Chinese puzzle haunts SA economy

China’s Hebei Iron and Steel moving to SA
Hebei Iron and Steel.jpg

At a time that South Africa is in danger of losing its steel manufacturing capacity, with almost 4 000 jobs in direct danger, China is poised to take over the local industry.

What makes this picture worse, is that it seems to be developing with the complicity of the South African Government (SAG).

If the logic of South African Communist Party (SACP) secretary general, Blade Nzimande, in an article on the SACP website, were to be applied, one could almost imagine that it was a plot to “delink (South Africa) from (Western) imperialism.

After they had apparently failed to persuade government to protect the local steel industry with import duties against the dumping of excess Chinese steel on the local market, the country’s two major steel manufactures announced plans to at least temporarily cease production.

The economic and employment implications of this development are huge. The two companies jointly employ in the order of 20 000 people directly. Many thousands more are employed by related industries.

 Aveng Trident Steel, distributor of specialised steel products, has already laid off 700 workers. According to the Metal Workers Union of South Africa (Numsa), steel trader Macsteel proposes to retrench 600 workers.

The economy of the Vaal Triangle industrial complex, south of Johannesburg, also depends to a major extent on the health of the steel industry. Unemployment figures are already climbing and smaller businesses feeling the pinch as activity at the local steel manufacturer, which started off about a century ago as Iscor, has been scaling down.

Giant steel manufacturer Evraz Highveld Steel and Vanadium was the first to announce its closure “primarily as a result of working capital constraints and reduced domestic demand in steel mainly due to a significant increase in Chinese imports”.

The Evraz announcement came after the Steel and Engineering Industries Federation of Southern Africa (Seifsa) has for some time been calling unsuccessfully for a tariff regime to protect local industry against imports from China. Some 1 200 workers are affected by this closure.

Gideon du Plessis, the secretary general of trade union Solidarity, said at the time: “This is a tip of the iceberg, we are going to see a lot more similar announcements from steel producers. South Africa’s steel industry is not being protected and government policy is destroying jobs.”

Then, less than a week later, ArcelorMittal SA, the country’s largest steel product producer, announced that it was putting its Vereeniging long steel works into “emergency care” until the end of August. Also, in that instance, the job security of some 1 200 workers is threatened.

The Vereeniging facility is presently running at only one third of its annual 500 000 tonnes capacity, producing products ranging from window frames to axles for locomotives.

Root of the problem

Globally there has been a slump in commodity prices on the back of weak demand. In the case of steel the situation is exacerbated by a huge oversupply, especially in China.

Global steel price has not only fallen to multi-decade low levels. In South Africa the 2015 demand has dropped to about 5 million tonnes, compared 5.4 million tonnes in 2013. To the detriment of local manufacturers of steel, during the same time imports have risen between 30% and 40%.

South Africa is one of the very few countries that have not implemented protective anti-dumping import duties, and has become a dumping destination for especially Chinese producers burdened with an estimated 300 million tonnes of excess annual production capacity.

How uneven the playing field has become for South African steel and steel-product producers, is well illustrated by the fact that Atlas Copco imports Chinese steel for their compressors and other machinery at 25% of the price at which ArcelorMittal is able to deliver.

It would seem as though the SAG is repeating the mistake it has made over the last two decades with regard to the agricultural sector – not supporting it sufficiently on very competitive global markets.

Nature of Chinese problem

Decades of rapid industrial expansion and production-driven economic growth have reached a stage where it has left the country with supply gluts in among others its steel sector.

The Chinese economy has entered a phase of transition from manufacturing-driven economic growth to consumption-driven growth. The Chinese government has, however, struggled to force outdated and loss-making plants to restructure or shut down.

Reuters reported the week before last that an official of China’s Ministry of Industry and Information Technology said at a media briefing that the only solution is to shift production facilities abroad. Tackling overcapacity would be a key task of China's next Five-Year Plan, covering 2016 to 2020, he said.

One of the steel plants under pressure to follow this route, is the controversial Hebei Iron and Steel Group, planning to shift at least five million tonnes of crude steel capacity (note how that matches South Africa’s present domestic demand) overseas.

And guess what, South Africa’s state-owned Industrial Development Corporation (IDC) has already signed a memorandum of understanding with Hebie to build a brand-new integrated steel plant in South Africa, which will be much bigger than ArcelorMittal’s Vanderbijlpark plant in the Vaal Triangle.

In the meantime, be it by design or accident, as it tries to get rid of the shorter-term problem of excess stock, the Chinese are killing off its future private sector competition in South Africa by dumping cheap steel on the local market.

Using Nzimande-like logic, one could almost suspect a conspiracy to kill off the “imperialist capitalists”, to clear the way for a bigger role in the South African economy by state-owned enterprises (SOEs).

According to Nzimande, who was part of a recent SAG delegation to China, led by Deputy President Cyril Ramaphosa, “our delegation held a very informative joint seminar with the Chinese on the role of State-Owned Enterprises (SOEs) in the Chinese economy”.

However, judged by what has just happened to South Africa’s recently introduced new visa regulations, despite strong private sector advice against it, the reasons are a lack of understanding of market forces by key SAG members in economically important portfolios.

Tourism Minister Derek Hanekom last week admitted that the new regulations have led to a “worrying drop” in foreign visitors and that a new approach may be needed. He has appointed a task team to look into the damage caused by the new regulations.

Ironically, one of the biggest drops, almost 40%, was in Chinese visitors after Chinese tour operators took the country off their offerings. Especially hard hit was North West province’s Lost City and Sun City, which were particularly popular among Chinese tourists. The facilities are important employers in the province with its higher than the national average unemployment rate.

Conclusion

It’s hard to say whether the growing interest in China is really due to the fact that, as the Rand Daily Mail speculates, “… the president (some say it’s Gwede Mantashe) is determined to import Chinese state capitalism to SA on such a scale that it cannot be reversed once he leaves ...”

It is, however, clear that, as Moneyweb Online last week argued in an article on the state of the economy and the dangers of the endemically high unemployment rate: “The sooner the ANC steps out of the headlights and recognises that a free market, or at least a 'free-er' market system is the only solution, the sooner fortunes will change.”

Also read: Pretoria, we have a problem                                                                                                          

                   What went wrong with SA’s agricultural sector 20 years ago?

by Piet Coetzer

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