Steel costs squeeze industry
Marlon Snyders tendered for the contract to erect a steel fence around the national archives in Roeland Street, Cape Town, in February this year. When he was awarded the job a few months later, the price of steel had gone up three times.
“I’m down about 50 grand on the job before I’ve even started,” says Snyders, who runs Ochre Construction, one of thousands of small metal businesses staggering under the astronomical rise in the price of steel products, which analysts put at between 60% and 70% since the beginning of the year.
“I had the option of withdrawing my tender (which remains valid for 30 days only). But if I withdraw, you know, are they ever going to give me another job? This was a job I just had to take.”
Apart from needing a high-profile contract to build a track record for his company, Snyders’ major concern is having enough work to recover the overheads of his ten-worker, 400m2 workshop in Ottery, Cape Town. This is becoming increasingly difficult as clients are repelled by the price shock.
Snyders says his typical domestic clients take a few months from first asking him for a quote to actually placing the order. “People can handle [a price increase of] between 5% and 10%—that was the norm all the years over a six-month period. Now, the [rise in the] price of steel affects your quotation by over 30% and the client just doesn’t understand.”
Miro Blazic, owner of Steel Valve & Engineering Supplies, a small regional steel distributor with a turnover of about R20-million a year, cites the example of a client who was recently quoted R19 500 for a steel fence around his house. It took him six weeks to raise the bond on his house by R20 000, but when he gave the contractor the go-ahead he was told that the price had jumped to R27 000.
“With the result that he says: ‘Listen, cancel. I’ve only raised a R20 000 bond on my house, where am I going to get another R7 000?’ So he went block and mortar—cement bricks,” says Blazic.
“I’ve been in the steel industry for over 30 years and I’ve never experienced anything like this. I mean, we used to have a normal quarterly increase of between 3% and 5%, but (now) we’ve been hitting over 15% and 25%—big increases at one time. It’s damaged the industry tremendously,” says Blazic. He recommends small steel contractors change their focus from domestic contracts to industrial projects, but even there it won’t be easy.
“We have the phone ringing all day, every day. We’re quoting and quoting and maybe we’ll get one [quote] out of ten. Whether it’s the fishing or whichever industry, people can’t believe the excessive prices. They reckon ‘well sorry, it’s not within our budget’.”
Snyders says he feels sorry for building contractors who signed fixed-price contracts before the increases started in February. So far, he has held off on committing to a specific price to a contractor who wants to sub-contract the balcony balustrades for a new block of flats out to him. At least he has the luxury of declining the job—the contractor does not, says Snyders.
In the short term, informal operators working from their garages and bakkies may see an increase in their numbers as marginal formal workshops scale down and as clients go shopping around for better prices.
“The sad part is that [a client] will find somebody that will do it cheaper. It will be a guy that operates on a smaller scale and just wants to survive. He’s going to lose money [on the job as a whole], but he just wants money for now. There are even guys who don’t intend doing the job. They just take the deposit from the client.”
Snyders says he’d be able to make more money by scaling down and joining the bakkie brigade, but it does not fit into his long-term plan of growing into a substantial business where economy of scale will make him more competitive. He is sceptical of merging with another company in order to reach that level, but is willing to consider forming a buying group with other, similar businesses so as to benefit from the steel industry’s rigid bulk-discount structures.
On the other end of the scale, large steel traders are said to be making a killing as they bulk up on steel bought at prices that seem cheap a few weeks later.
“The above-medium guys, especially those who have stock-piled, take huge advantage of the price increases,” says Justin Jacobs, an underwriting manager at the credit insurance firm Coface.
Small steel distributors say they have seen a “superficial” increase in their turnover because of the higher prices that they pass on to the building industry and engineering workshops, but that it hides a decline or, at the very least, a stagnation in volumes.
“Because the cost of steel has risen by over 70% in the past year, our sales turnover has risen accordingly, basically reflecting a false growth, I suppose,” says Eddie Winsor of Roofing & Steel, a R20-million-a-year steel merchant.
Although not everyone is equally affected, small steel operators seem to share a strong conviction that the root cause of the dramatic rise in steel prices is the monopolistic position of South Africa’s steel giant ArcelorMittal, although Jacobs, who counts ArcelorMittal as one of his clients, points to the fact that global prices have risen even faster than those in South Africa.
Winsor believes Mittal simply shrugged off the Competition Commission’s recent fine for abusing its “super-dominant” position by passing the cost of the fine downstream.
“Having penalised Mittal with that huge fine just means that they pass it down the line to all of us.”
Snyders says: “Mittal is obviously the number-one winner here and I think suppliers that supply to guys like us also stand to win because they just pass the increases on.”