The growing consensus that localization is some sort of silver bullet that will solve our economic and job creation problems is misplaced, writes Duferco Steel Processing MD Ludovico Sanges, adding that localization policy must be carefully calibrated to drive economic growth and not simply favor incumbents in the market.

Localization is rapidly gaining popularity as a policy that will kick-start economic growth and transform the economy. The Center for Development and Enterprise’s (CDE) penetrating analysis of the dangers of localization makes it clear that this is by no means certain and that localization is, in fact, a complex web of trade-offs and unintended consequences. which must be carefully weighed. .

The steel industry shows how important many of the issues raised in the CDE paper are and how much more thought is needed in policy – ​​followed by swift action.

The first point to underline is that the definition of location within the steel industry remains opaque. For example, would Duferco count as a local supplier? Thanks mainly to the reckless decision to close Saldanha Steel, we had to resort to importing hot rolled coils (HRC). We take advantage of this imported HRC to produce galvanized steel, which is then used in a range of downstream industries. Would this fortified product be considered “local enough” to fall within government procurement guidelines for the much-heralded infrastructure program and now the big shift to renewables? Our efforts to obtain clarifications from the Department of Commerce, Industry and Competition (DTIC) have so far remained unsuccessful.

The reason Duferco has to import the basic HRC for enrichment is simply that, apart from the fact that the remaining outdated ArcelorMittal South Africa (AMSA) plant at Vanderbijlpark is unable to supply the quantities we need reliably, its quality is inconsistent and, more importantly, AMSA does not tolerate competition in the domestic flat steel market.

This last point is an example of one of the unintended consequences of localization raised in the CDE paper – the impact of localization on cost and quality. Localization risks imposing additional costs and inefficiencies on the entire economy. ISCOR/AMSA is a well-known product of a previous localization campaign under the former apartheid government, and was able to establish itself as the dominant (and now sole) supplier to the HRC of which all steel producers have need – it’s just not very competitive because it doesn’t have to be. AMSA’s protection continued into the Democratic era via tariffs on imported steel.

Duferco requested in July 2020 a rebate on these tariffs to protect its own activities and those of other members of the steel ecosystem but the DTIC has still not responded. Ironically, this “local” (albeit international) AMSA protection negatively affects another localization project – it should not be forgotten that Duferco South Africa is a 50% joint project with the Industrial Development Corporation (IDC ), making it a much larger project. more local company than AMSA.

It should be noted here that when Duferco imports steel and benefits from it for export, we are competitive in global markets because we do not have to pay the import duties imposed to protect AMSA in the domestic market. Local markets do not benefit from any of the advantages that are in reality reserved for foreign customers.

It must also be recognized that the inherent cost and inefficiency of localization is passed on to the rest of the economy, because steel is so fundamental to virtually every industry. In South Africa, steel directly creates 190,000 jobs; the main steel-consuming industries contribute about 15% to our gross domestic product and directly and indirectly employ eight million people. All of these businesses are made less efficient and competitive due to the protection given to AMSA. The sustainability and growth of jobs across the economy are also affected.

At the same time, domestic consumers are affected by higher prices and, very often, by inferior goods. It is truly tragic that all these efforts by the government and the downstream industry are being thwarted, having no oriented business plan to make the South African primary steel industry more competitive with international manufacturers.

Making the local steel market more competitive will also help ensure that South African companies can be more competitive in global markets because the steel they use is cheaper and of good quality. Need I add that a strong export sector is essential for an economically healthy South Africa?

In conclusion, I would like to point out that Duferco – and other members of the steel ecosystem – are all in favor of localization, but its clear objective must be economic growth and not just blind protectionism. The CDE report denounced the deleterious effects of a lack of competition on economic growth and industrialization. This is a perfect opportunity for the government to smartly pursue its localization strategy by moving us away from a steel monopoly in which AMSA is both the only local producer of HRC and has its own re-rolling business. In doing so, it will create the conditions for a vibrant, job-creating local steel industry on the back of the real, free and fair competition that downstream manufacturers desperately need.

To illustrate this point, consider the very topical issue of the transition to renewable energy. It is calculated that 35 t to 45 t of steel are needed for each megawatt of solar energy added to the grid. Despite the subsidized loan announced at COP26, it is clearly vital that this steel is obtained at the best price and quality, and that there are no supply bottlenecks. Duferco and other rerollers that use imported steel can provide the competition needed to challenge local market dominance by a complacent incumbent like AMSA. We already know that AMSA cannot reliably supply the HRC we currently need at the right quality and price – how will it cope with the massive quantities the proposed solar deployment will require?

The ball is in DTIC’s court.