If you want a serious and credible perspective on the wire and steel industry in South Africa, please look at the facts and not at wild and grudge-based statements. I represent a few small companies that are bit players in the overall scheme of things. We happen to get drawn into situations over which we have little say or sway.
You would be misguided in focusing your attention on me or any of the companies in which I am involved. We don’t belong to any of the large steel groups that are vertically integrated and have downstream wire interests in competition with us.
We have complex relationships in which they are our steel and wire product suppliers and we are the customers, distributors, agents and, sometimes, competitors. The Competition Act has no way of dealing with these complexities and the Competition Commission rejected our application for an exemption.
In this world of double standards we are treated differently to other industries. We also do not belong to any of the large construction companies such as Murray & Roberts, Aveng and WBHO, the subsidiary companies of which are the major players in the reinforcing and mesh case. The big players are the ones who design the game, start it, play it and blow the whistle. We sit on the bench.
It is the big steel producers that mainly determine events in the steel industry. We are a small group of independent players that represent the competitive factor in an extremely competitive industry dominated by powerful and wealthy groups.
You have to only look at the financial accounts of the wire producers to see how marginal the business is and why there is so much desperation. The wire industry is trapped between high domestic steel prices and Chinese finished products imported at prices cheaper than we can produce them. We have been closing factories and sending semiskilled workers, who we have trained, back into poverty. Consequently, South Africa exports iron ore to China and imports finished goods like nails from China.
Why manufacture and get beaten up by the government, the commission, labour unions and 1 001 pieces of legislation pouring out of the
government printers?
A hostile environment
Companies are desperately trying to stay afloat and have to abide by what the greater industry of steel producers is dictating. As you are aware, there is a hostile environment between the government and ArcelorMittal. The strategic and leadership role Iscor once played is now missing and probably gone forever, leaving a shrinking steel industry unable to organise and compete. It is in disarray and directionless and we are powerless to do anything. We must simply watch it slowly sinking.
The whistle-blower in the wire case, as well as the long-steel case, which is still to appear before the Competition Tribunal, happens to be Anglo American. It wishes to discard its baggage so that it can rid itself of its steel interests in South Africa to concentrate on the more lucrative business of exploiting ‘international cartel” iron ore prices.
The reality is that nobody wants to be in downstream manufacturing in this country. Anglo cannot find buyers for Scaw Metals because the steel world knows the government-induced problems South Africa faces. The cost of adding value is too high and takes place in an environment that is hostile and not competitive.
Anglo realised this when it made its board decision. Electricity prices have made electric arc furnace steel production unprofitable and these producers have been central to pressures of stabilising the market.
Consolidated Wire Industries (CWI) is jointly owned by the two biggest steel mills, Scaw Metals and ArcelorMittal South Africa. Between them they control 80% of wire rod production — the feedstock to the entire wire industry. These mills, in turn, are owned by Anglo and ArcelorMittal, two of the biggest companies in the world. It seems grossly unfair that those able to create the game to get off free, while those on the sidelines get hammered and put out of business. We are not in a position to influence anything and can contribute little.
Incestuous relationships are accepted as a way of life in the motor industry and car manufacturers share components, manufacturing facilities and distribution outlets. They also administer price increases at will, with government support. The joint ownership of CWI by two supposedly competing steel mills is quite acceptable to the government, but tiny players like Agri Wire, which was an appointed distributor of CWI’s products, get attacked and forced out of business by the big players and the commission. That is how the system works.
South Africa has a steel capacity surplus of about 35% that has to be subsidised by the domestic market. Consequently, domestic prices are higher than export prices. This means we export steel and downstream products through an industry-
administered export assistance scheme.
Because of the higher domestic steel prices we also suffer from imports of finished wire products, including fencing meshes. Therefore, stabilising the domestic market, particularly during economic downturns, results in much talking taking place in the industry. This is mostly functional and defensive and essential, and it has been the case for some 40-odd years.
It is difficult to see how competition and smaller players can survive. It is unfortunate that, as a result of this government’s attitude towards competition and the arbitrary nature of the law, a large number of companies are simply going to the wall needlessly — and the Act is having the opposite effect of what was intended. The commission has stated that it is not concerned about the state of the industry (or the job losses), only whether it is legal or not.
Having been in the industry for many years, I can assure you that whatever talks may or may not take place in the industry mean very little because any slack in margins is quickly taken up by the steel mills. By definition, our industry
is marginal.
Cartels reflect industrial weakness
The government should not be surprised by the seemingly large number of cartels in South Africa, such as in the construction and allied industries. They simply reflect industrial weakness, the cyclical effect and the process of a breakdown of industrialisation, rather than exploitation.
The problem is that functional and defensive actions become dysfunctional when markets turn and capacity destroyed in the previous recession leads to inflationary pressures. When times are good the need for cartels quickly dissipates, new competitors enter the market and prices are corrected. It has been the case for decades, long before the 1998 Competition Act that is doing more harm than good.
Industry has to get a return on capital to justify its existence. In South Africa it is struggling to do this because organised labour and the government have far more pricing power and administer cost increases well above the inflation rate, and do so at will. The legislative imbalance is weakening industry and spawning the very defensive behaviour it despises.
As pointed out previously in Engineering News, the commission, in its wisdom, attacked our steel agreement with Iscor/Mittal in 2003. The case against us and ArcelorMittal is still outstanding, long after our steel agreement expired. It was not renewed as a result of government hostility.
ArcelorMittal is attacked by the commission for providing discounted steel to us in terms of them accepting our bulk off-take agreement, and then is also charged with excessive pricing, as in the Harmony case. So, no matter what you do, you will be judged guilty of some offence in the scheme of things.
Our steel agreement was designed at the time to enable Iscor’s Newcastle steel mill to compete against the vertically integrated steel mill groups of Cape Gate and Scaw Metals/CWI. The outcome of the commission’s actions was, in effect, to destroy competition in the wire and steel business — resulting in the very problems that now exist.
The commission did so by applying the law in an arbitrary fashion, without taking the trouble to understand the industry, the damage and the principles they were destroying. It is blind law. The closure of the Cisco steel mill after 50 years is a prime example of what competition law is doing in South Africa: preventing industry from saving themselves in difficult times.
However, it appears that politics and populist positions are more important than saving industry and jobs, let alone reversing the situation by building industries and surplus capacity able to export and compete internationally.
Unemployment and the breakdown of industrialisation are inevitable outcomes that reflect the different planets on which industry and government operate.
Unfortunately, it is a fact of South African life that nobody is interested in what is really going on apart from whistle-blowing and fines of billions of rands being imposed on industry. Industry can ill afford what the government is doing. The money would have been better spent on industry, instead of ending up in the government’s pockets.