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South Africa Metals Report Q2 2010
Business Monitor International, March 2010, Pages: 51
The South Africa Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on South Africa's metals industry.
The South African steel industry will benefit from the gradual recovery of the economy, particularly the rebound in the construction industry which should boost orders for rebar and wire rod. In 2009, crude steel output dropped 12.5% year-on-year (y-o-y) to 7.48mn tonnes as local steelmakers reduced furnace capacity utilisation in response to falling domestic and export orders. However, the decline was not as bad as the 19.4% fall we had forecast in the previous quarter and by Q409, crude output was up 59.5% y-o-y to 2.08mn tonnes. The key factors driving the expansion in production were low inventories and resumption in construction activity, assisted by government infrastructure projects and preparations for hosting the FIFA World Cup in 2010.
Output was still poor by historical standards with furnaces still operating well below capacity. The report estimates that, despite strong growth y-o-y growth, capacity utilisation in Q409 was still only around 70- 75%. Moreover, the market is characterised by volatile purchasing activity which makes distributors unwilling to increase purchases, although confidence within the industry was being restored by Q110 with a less bearish outlook among buyers. In 2010, the report does not foresee output levels rising much above those of Q409.
With the automotive industry lagging behind the construction sector, flats will lag behind longs in the recovery process and as such aluminium will grow more slowly than steel. The analyst forecasts 6.5% growth in crude steel production in 2010 to 7.97mn tonnes. The effects of the infrastructure stimulus measures should continue for some years, but crude steel production is not expected to return to pre-recession levels until 2014. Meanwhile, domestic apparent finished steel use is forecast to reach 6.9mn tonnes in 2014, surpassing 2008 levels, while exports are expected to total 1.36mn.
Major challenges to growth remain. In the short term, steel suppliers will face cashflow problems and will be focused on merely treading water. This will limit capital investment in new capacity and as such the publisher is not expecting major increases in capacity until H211 at the earliest. Steel prices will rise, not as a result of any significant tightening of the market, but due to cost pressures, notably on raw materials and electricity. These factors will be a major hindrance to growth over the medium-term, particularly if the proposal for a 35% increase in electricity prices over the next three years goes ahead, which will raise costs at EAFs and smelters as well as the costs of manufacturers down the production chain and buyers in end markets. A factor sure to hinder production in South Africa is the current energy crisis hitting the state’s energy provider, Eskom. While the provider is coming under increasing pressure to meet energy demands, utilities in key aluminium-producing regions like Russia are generating electricity from relatively low-cost hydro sources. This, coupled with low operating costs at sites in regions such as the Middle East, have further hindered the chances of South Africa making an impact upon the aluminium market, especially in the short term.
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