The global steel industry is set to undergo a radical make over due to the discovery and exploration of shale gas in the United States and other parts of the globe. Gas prices are set to remain at historically low levels for the next three decades and set to reduce the cost of energy. This will force steel companies worldwide to rethink their business model, seeing that 40% of its costs are energy related.
For South Africa to benefit from the lower gas prices and see the SA steel industry boost manufacturing and create jobs, the country could look to take a number of important steps to reshape its steel industry, such as:
- Beneficiating its steel much further along the value chain.
- Putting in place Protectionism policies to rebuild the intermediate steel value chain.
The Deloitte report on the global steel industry, entitled Remaking of the Global Steel Industry: Lower Cost natural gas and its impacts, argues that most steel producing countries that use gas to manufacture steel, are set to benefit from a 30 year outlook of low gas prices.
Cheaper gas prices are expected to lead to increased use of Direct Reduced Iron (DRI) as a favoured method of production. DRI leads to cleaner steel, but volatile gas prices over the last three decades made capital investment planning difficult. The discovery of vast gas deposits in the US and elsewhere is likely to change this. However, South Africa is potentially less likely to benefit to the same levels, due to take-off agreements not being in places as yet from the gas fields of Mozambique.
Government’s efforts in urging South African companies to buy steel locally are correct, but only a reform of the sector will lead to the creation of new jobs. The SA steel industry currently processes significant volumes of its steel up to and intermediate state. It is then exported to other countries for further beneficiation only to be sold back to SA at higher value.
A beneficiation policy has been on the cards for over a decade. The two most commonly cited obstacles to successful beneficiation are the state of power supply and a shortage of skills.
What South Africa needs is a regional framework with its immediate neighbours for the supply of inputs such as gas as well as any excess power to neighbouring countries to help them create their own beneficiation industry and in turn spur demand for South African steel, electricity and possibly skills.
South Africa thus needs to create downstream linkages between raw materials and the finished product in order to create downstream manufacturing opportunities.
To read on, please click here for the full report
If you have any questions or require a more detailed discussion, feel free to contact Eugene De Klerk (Director – Deloitte Consulting)