SA commits to new steel mill despite global oversupply

Some of the biggest local steel producers are scaling back as a surge in subsidised Chinese imports squeeze margins.

The Industrial Development Corporation affirmed its commitment to building a $5 billion steel mill in South Africa despite companies scaling back operations and a global glut because it wants to support infrastructure projects and urbanisation on the continent.

The state-owned finance institution’s project with Hebei Iron & Steel Group, China’s biggest manufacturer of the material by output, will make products specifically for the local market and will be sold at competitive prices, Abel Malinga, head of mining and metals at the IDC, said in an interview in Johannesburg on Thursday.

“We are going ahead with it,” Malinga said. “We are not going to change our minds. China will not produce steel for us, for our needs. We have different needs.”

The new mill would produce as much as 5 million metric tons of steel annually, according to Malinga. That compares with the 6.6 million tons of crude steel the nation made last year, according to the South African Iron and Steel Institute. Some of the biggest local producers of the material, including a unit of ArcelorMittal, have announced plans to cut a total of more than 2 400 jobs as a surge in subsidised Chinese imports supplied at prices as much as 25% below local production costs have squeezed manufacturers’ margins.

One of those is Scaw Metals Group, in which the IDC holds a 74% stake. It incurred a loss of R1.1 billion ($81 million) in the year through March and is planning to cut 1000 jobs, according to the development-finance institution.

The IDC is now looking at applications to invest in Scaw in a move that could potentially break the company up into its four divisions in a restructuring that is aimed at making it a “sustainable business,” Malinga said.

Cheaper Production

The new mill would produce steel cheaper than other incumbents through utilising its own sources of inputs including iron ore and coking coal in a plant equipped with new technology, Malinga said last month.

“China will not produce steel for us, for our needs,” he said. “We have different needs. Right price, right quality, right specifications. It’s for infrastructure, but also we need to increase our manufacturing capacity.”

Other steel producers risk going out of business as they failed to invest in more efficient technology, he said. Chinese imports will decrease once economic growth accelerates in that country, Malinga said.

The new steel mill will produce its first steel by 2020, Malinga said. The facility will be located near Witbank in the Mpumalanga or Richards Bay in KwaZulu-Natal, he said.

©2015 Bloomberg News

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