Safeguard Domestic Steel Production

14 November 2024

Amidst global and local steel oversupply, nations such as the USA, as well as those in South
America and Europe, have implemented protective measures, including increased import
tariffs, to shield their domestic steel industries from competitors like China. The USA's
proposed tariff escalation on Chinese imports to 60% is likely to compel Chinese companies
to seek less-protected markets. Currently, South Africa is an attractive option for global steel
manufacturing companies as a channel to get rid of their oversupply, as the protective
measures in place in the South African steel market are substantially less stringent than those
in many other areas of the world.

The resulting oversupply of imported steel into South Africa impacts a domestic market that
already has sufficient carbon steel hot-rolled flat production capacity. Historically,
ArcelorMittal South Africa (AMSA) has supplied most of the flat carbon steel needs of the
domestic market, with the shortfall caused by the closures like that of Highveld Steel in 2016
made up by imported material. In 2020, however, the collapse of global supply chains caused
by the Covid-19 pandemic created a sudden and critical shortage of structural grades of flat
carbon steel in South Africa, especially in the grades required by the essential mining and
construction industries. In reaction, and in addition to its other actions in support of the
coordinated private sector response to the pandemic, Columbus Stainless immediately
embarked on a process of manufacturing the structural grades of carbon steel urgently
required in South Africa, while maintaining its production of stainless steel for local
consumption.

Since the 2020 crisis, Columbus has produced almost a million tons of hot rolled carbon steel
in slab, coil and plate. Columbus remains the only integrated steel mill in Africa where
stainless steel and carbon steel is manufactured in a single facility. Due to the innovative
production strategies followed by the company, this feat was achieved without requiring any
investment from its shareholders.

With the very recent addition of hot rolled coil manufacturing capacity by Scaw Metals, the
domestic market for hot rolled flat carbon steel is more than sufficiently supplied. This
oversupply is not due only to excess production capacity, but also stems from systemic
challenges in the South African economy. The most relevant of these challenges are the lack
of government infrastructure spending in recent years, exacerbated by the electricity supply
challenges that severely impacted downstream steel consumption due to the hardship faced
by the whole industry.

It is clear that cooperation between the South African government and the steel
manufacturing industry is of the utmost importance, both in terms of addressing the
underlying economic and other issues that created the current lack of local demand, but also
in terms of urgent protection to assist the local industry in defending itself against outside
threats like excessive imports, which has the potential to severely harm this vital industry.

Columbus believes that a fundamental aspect of this coordinated response should be the
protection of our scarce national resources, and that these resources should be managed in
a holistically beneficial manner designed to create the maximum benefit for the total South
African economy. Therefore, the export of any non-beneficiated raw materials, whether as
ore, scrap, or in any other form should be critically examined with the ultimate goal of using
South African resources for the overall benefit of South Africa. Specifically - the export of raw
materials, including scrap, should be managed in a way that ensures overall cost
competitiveness in the manufacturing industry, where the most benefit lies for the country,
due to the ability of the manufacturing sector to create both employment and revenue.

The recent surge in global scrap prices, intensified by the imposition of export taxes by certain
countries, poses a significant challenge to South African producers who incorporate scrap into
their manufacturing processes. In South Africa, electric arc furnace (EAF) operators are heavily
reliant on ferrous scrap steel as a primary raw material. This reliance on scrap steel enables
local steel producers to maintain their competitiveness on the global stage, not only in terms
of cost, but also due to the environmentally friendly nature of maximizing scrap utilization.

Environmentally friendly steel manufacturing techniques employed by certain South African
steel producers, like Columbus, support over 5000 jobs, while adhering to international
standards. These processes are both economically viable and competitive on a global scale.
Given the growing emphasis on the green economy and the implementation of measures such
as the Carbon Border Adjustment Mechanism (CBAM) by the European Union, South Africa's
carbon-intensive electricity generation, which relies on coal, poses additional challenges. In
order to minimise the carbon footprint associated with steel production, it is essential to
utilise domestically produced scrap metal.

Given the critical importance of the domestic steel industry to the South African economy,
the inherent environmental and economic benefits associated with utilising scrap in steel
manufacturing, and the necessity to conserve scarce resources such as scrap for the national
welfare, the significance of preserving affordable, high-quality scrap metal for the local
industry becomes readily apparent.

Clearly, the prohibition of scrap exports should be actively reconsidered to accurately assess
the adverse effects of permitting this valuable resource to leave the nation's borders. An
alternative, albeit less stringent, approach would be to retain the scrap steel export tax. In
the absence of a scrap export ban, this tax would play a pivotal role in ensuring the
sustainability and long-term viability of environmentally friendly and globally cost competitive
domestic steel production, by securing an adequate supply of scrap metal. The scrap export
tax is presented as an alternative to the existing Price Preferential System (PPS), with the PPS
specifically designed to curb scrap metal exports by establishing a price below the FOB
Rotterdam scrap price. The PPS price is determined by factoring in export distribution costs
to establish a net export parity price for ferrous scrap.

In the absence of a scrap export ban, a scrap export tax would contribute to the survival of
numerous local steel mills, preventing significant job losses. This aligns with the government's
commitment to industrial diversification and sustainability further supporting global efforts
to promote recycling and the decarbonisation of the steel sector.

South African steel producers, including Columbus Stainless, are eager to collaborate with the
government to ensure that policy decisions are made in the best interests of the industry and
the nation. A holistic approach that protects the diversity and sustainability of the entire steel
value chain is essential for the future success of the South African steel industry.