South Africa was once a significant world player in the steel industry. Today the sector appears to be in terminal decline. Output and employment in the industry have been falling for many years and smaller businesses are finding it increasingly difficult to operate.
It is an industry beset by multiple pressures from labour, poor industrial relations, and strike-related violence as well as a poor economic environment. An uneven tariff regime protects the country’s primary steel producer, ArcelorMittal South Africa (AMSA) at the cost of the downstream sector. Meanwhile, the downstream sector often faces competition from goods that enter the country at low or no duty.
An unreliable supply of high-priced electricity is a serious cost pressure for the entire industry. Logistics across the country are deteriorating, and there is the pressure of low demand because of poor business conditions.
A strike by the National Union of Metalworkers of South Africa, NUMSA, is now in its third week and is taking a heavy toll on production and sentiment in the industry. It is the violence and threats around the strike, and the slow reaction of the police, despite pleas, that have unnerved many smaller metal working firms.
The pressure on profits in the industry and the tension around the strike are pushing mainly smaller and family-owned businesses to the wall. Gordon Angus, Executive Director of the South African Engineers and Founders Association, one of the largest employer associations in the metal and engineering industry, says he has never heard so many owners questioning whether they should continue in business. This is unlikely to be bargaining talk related to the strike, as the forces undermining their business are real and growing.
The sector was hit hard in the wake of the recession that followed the global financial crisis in 2008, and it was only in 2013 that it fully recovered, according to the South African Iron and Steel Institute. And since 2013 the sector has hardly grown. Primary steel production capacity, the basic input into manufactured products, has nearly halved since 2007 from 12 million tonnes to 6 million tonnes. Domestic consumption is about a third down on 2007 and exports are flat.
There has been heavy job shedding for more than a decade. From 2010 to 2019 employment in the entire sector was down by 17 percent, a loss of nearly 32,000 jobs according to the Department of Trade, Industry and Competition’s Masterplan document.
Two cost pressures that could be addressed, albeit with great political difficulty, play a large role in the industry’s troubles. One is the way in which labour rates are settled, and the other is the destructive effect of high tariffs on primary steel, the basic input. The status quo heavily favours large over small firms.
South African industry is burdened by an outmoded system of centralised bargaining, under which wages settled between unions and a few, usually larger, employers can be legally imposed on “non parties” in the industry. Larger players in the industry with economies of scale and pricing power can more easily afford union wage demands. For some small metal working shops, payroll can amount to 30 percent of costs, although these tend to average 15 percent according to the industry. For the larger player, labour amounts to between two and four percent of costs.
A particularly burdensome cost pressure for many businesses is the relatively high minimum wage in the steel industry. At R12,700 a month, the minimum wage, very often paid to the unskilled, is mostly well beyond the economic value that the company can obtain.
The minimum wage for entry-level and unskilled employees in the steel industry has for many years been well above that in many other sectors. The entry-level wage rate in the metal and engineering sectors is now more than double that in the motor and furniture industries, and almost four times the national minimum wage.
One of the reasons for the rapid rise in the minimum wage is a concession made by the leading firms to unions in 1992. This allowed increases to be awarded on actual rates of pay and not on minimum levels. With compounding increases over time, the wage bill rises have become a source of high cost pressure and lack of industry competitiveness.
One reason for union militancy might be that one wage-earner on the current industry minimum may have to support up to ten dependents. If more can be taken into jobs, albeit at a lower minimum wage, the number of people the one worker on the minimum wage needs to support is reduced.
Over the past five years the National Employers Association of South Africa (NEASA) has taken court action to prevent the bargaining council in the sector extending wage deals to firms that were not part of the deal. With the slim likelihood that a new deal will be able to be legally extended, much has changed in the industry. NEASA members are free to negotiate and reach deals on a plant level. While most firms will ultimately pay what emerges from the industry’s bargaining council, the old way of reaching wage settlement cannot be imposed any longer on the unwilling.
Another factor behind cost pressure in the industry is due to the uneven and unjust tariff regime, which protects SA’s monopoly foreign-owned primary steel producer, AMSA. The 18 percent tariff, reduced under a settlement after threats of court action to 10 percent on imports since September, is a heavy price for the makers of steel products to pay.
In world terms AMSA is a midget and lacks the vast economies of scale of Chinese and Indian plants. It cannot compete with Chinese steel. Yet local buyers are effectively forced into buying the local product. So far this year, AMSA has imposed a 23 percent rise in its prices.
That means input costs for a vast number of firms are far higher than they would be under a less protectionist regime. But the government is intent on upholding “localisation”, which in plain language is protectionism. This means their final products are often not competitive in the domestic market, as many finished steel products can be imported with little or no duty, due to trade agreements.
The battles over the imposition of centralised settlements and the uneven tariff to protect one company are fundamentally between large and small firms. This wipes out any credibility of the government’s support for small business. If the industry is to emerge from its long decline, the preferences for the big players will have to be eliminated.
The government’s answer to these problems is an ill-conceived “Masterplan” which focuses on “localisation” and an infrastructure programme to push-start the sector’s recovery. The sizeable government budget deficit and lack of interest by big investors in the country means mammoth infrastructure investment is highly unlikely. Better would be for the government to get out of the way by scrapping localisation and the parts of the labour laws that make them inflexible.
The views of the writer are not necessarily the views of the Daily Friend or the IRR