MANUFACTURING: Steel Producers Hold Their Own
Recent Western Cape Business News
LOCAL steel producers, to a large extent, held their own in 2009 despite of a number of them reporting downsizing and other survival measures. The severe downturn in the global economy was cushioned by the special circumstances regarding the construction of power stations and government’s low-cost housing and infrastructure spending.
Credit insurer Coface South Africa says many of the bigger players were assisted by the demand for hundreds of thousands of tons steel required for Eskom’s new power stations. South African companies have been awarded the largest orders for structural steel in South African history and all this steel is being produced locally.
South Africa also has a significant backlog of infrastructural reinvestment that needs to be addressed. Because of this, sustainability of government’s Infrastructure Roll-Out Programme should last well beyond 2010. Therefore, South African steel producers are not looking at the current economic conditions as a threat to the future of the programme, with the recent drop in prices only alleviating some of the pressures associated with funding.
A further decline in the market is not expected, but current conditions should continue in the foreseeable future, with an improvement towards the end of the first quarter of 2010. Cashflow for many steel suppliers will remain the major issue, with the aim now being survival.
The few companies with the cashflow to carry some capital expenditure for a few months may attempt to position themselves to up their market share, if the market should turn in early 2010. Meanwhile the steel construction industry has doubled its production capacity since 2006 by investing heavily in new production facilities, equipment and materials management systems to the extent that South Africa currently has one of the best equipped and most productive steel industries in the world.
All indicators point towards a recovery in the steel price in 2010. This view is based on projected price increases in the raw materials used in the manufacturing of steel, electricity price increases, and an expected increase in demand for steel from the manufacturing sector.
A global iron-ore price settlement, 10% up on current prices, is expected from price negotiations between the major suppliers and consumers in the near future, with the rest of the world following suit. There are already indications of stockpiling taking place by major steel manufacturers, in anticipation of 2010 price increases.
The global demand for steel fell in the last 12 months. This resulted in a subsequent drop in the demand for coking coal. The most significant growth potential for coal lies in steel manufacturing. Some definite positive signs of an increase in demand for steel are already evident through the subsequent demand for coking coal.
The spot prices of coking coal and thermal coal have increased by 33% and 18% respectively in the last few months, with Eskom’s expected increased consumption also adding to the increase in demand. South Africa’s severe power shortages are likely to continue unless there is significant investment in new power stations with the resulting increase in demand for coal, and the demand for steel to build these power stations.
The biggest local consumer of steel products is the manufacturing sector, with structural steel (used mainly in infrastructure development) being the largest subsector, and building and construction; mining; and automotive sectors being the other major consumers.
The South African manufacturing sector bottomed out in April 2009, and although recovery has been painstakingly slow, there is a definite upward trend with year-on-year production decreases shrinking every month.
Given the delay or suspension of mining projects, necessitated by the current global economic slowdown, it is expected that the mining sector’s steel demand will also increase in 2010 as these projects get back on track.
The greatest threat to a recovery in the South African steel industry is the proposed increase of 35% per year for the next three years in the price of electricity. This will not only have a significant effect on the cost of producing steel, but also affect the production costs of manufacturers of fabricated steel products, and impact on the cashflow and steel consumption of the end-user, which effectively drives the whole industry.
Some inventory build-up to take advantage of the rising prices could also lead to a ‘technical recovery’ in the industry. As was the case in 2009, this ‘recovery’ could stimulate the industry and result in increased production by manufac-turers, but ultimately be short-lived. Should wholesalers and retailers become fully stocked, further orders could die down with the resulting cut in prices due to lack of demand. All stocks held will be devalued overnight and force players to reduce their margins or in severe cases even sell at a loss.
Business News Sector Tags:
Fax 2 Email
Study IT Online
Work from Home