key points downstream beneficiation case study:...

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JaredTalkin1,2

March2016

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Despite the creation of theNewGrowthPath(NGP)asaframework for economicpolicy and job creation, theGovernment has had nosuccess in fosteringdownstream beneficiationthroughlegislativeinitiatives.

While the state owned steelcompany Iscorwas privatizedin 1989, there has been areversal of this policy stancesince the mid-1990’s towardsincreasednationalization.

KeyPoints

2 The author would like to thank Perrine Toledano and Nicolas Maennling for their insight and guidance during the course of this project. Also, the author would like to thank Paul Jourdan and Antonio Pedro for their review of this case study.

CCSIPolicyPaper

DownstreamBeneficiationCaseStudy:theRSAThe industry was structuredand grew with the mainobjective of providing steel tothe domestic and regionalmarkets. As the steel marketbecame more globalized andthe RSA had to compete withimports, it became evidentthat the industry was notcompetitiveenough.

TableofContentsKeyPoints..................................................1Introduction.............................................1SteelIndustry1910-1930.................2SteelIndustry1930-1950.................2SteelIndustry1950-1958.................4PrivatizationofIscor...........................5ContemporarySteelIndustry.........6KeyConclusions..................................10Appendix.................................................13 Bibliography..........................................14

Introduction

The Republic of South Africa (the RSA)was selected as a beneficiationcasestudyduetothepresenceofalong-standingironandsteelindustrythatdatesbacktothebeginningofthetwentiethcentury.Historically,theRSA has large domestic reserves of thermal coal, iron ore refractories,and dolomite and limestone, which are the basic inputs for theproductionofironandsteel.Furthermore,overthepasttwodecadestheGovernment has actively pursued policies aimed at fosteringdownstreamactivities,suchasironorebeneficiation,

For thepurposeof this case study, ahistoricaloverviewof the theRSAironandsteelindustryisgiven,beginningin1910andcontinuingtothepresent. This overview will examine the industry with a focus onGovernment policies and other factors that fostered downstreambeneficiation in the RSA during this time-period. Specific Governmentpolicieswillbeidentifiedandtheirrespectiveeffectswillbehighlightedwhenpossible.

1 Jared Talkin is a research fellow at the Columbia Center on Sustainable Investment.

DownstreamBeneficiationCaseStudy:SouthAfrica

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IronandSteelIndustry1910-1930CommercialironoreextractionandbeneficiationintheRSAcoincidedwiththeestablishmentofthemodernironandsteelindustryduringtheperiodspanningfrom1910to1925.From1910to1916,three steel plants were established in the Transvaal province.iFrom very early on, governmentalinterventionwasafactorinthedevelopmentoftheSouthAfricanironandsteelindustry.TheUnionSteel Company of South Africa (Usco)was founded in 1911,with the aim of producing steel fromscrap iron salvaged from the railways. The Government granted Usco the preferential right topurchasescrapironfromtherailroadatasetpricefor16yearsundertheScrapIronAct1910(SeeAppendix1). The agreement also included a guaranteed purchase for all finishedmaterials, if theGovernmentdeemedthemofsufficientquality.iiThisagreement,betweenUscoandtheGovernmentresultedintheconstructionoftheplantontheVaalRiver,whichwascommissionedinSeptemberof1913. Initially, Usco built a 10-ton open-hearth furnace in order to produce fencing posts.iiiDuringthis time-period, a number of small-scale private steelmakers also sprang up, including: DunswartIron& SteelWorks Ltd. (1911), Transvaal Blast Furnace Co. Ltd. (1916), Pretoria IronWorks Ltd.(1917),andNewcastleIron&SteelWorksCo.Ltd(1918).

The period of 1926-1930 saw both an expansion of the Transvaal steel industry and theestablishmentofpig-ironmanufacture.Uscocommissionedtwoplantsin1926,locatedinNewcastleandKliprespectively.TheGovernmentalsoadaptedan importsubstitution industrialpolicy,whichprotected the iron and steel industry. This strategywas solidified through thepassingof the1925Tariff Act (seeAppendix 1), which established tariffs ranging from 20 to 25% on imports.ivThisprotective tariff, coupledwith thenaturalprotection inherent toSouthAfrica’sgeographicdistancefromsteelproducingcountriesalongwiththegrowingdomesticdemand,actedtocatalyzethegrowthoftheironandsteelindustry.

The South African Iron and Steel Corporation (Iscor) was established in 1928 as a result of thepassageofTheIronandSteel IndustryActNo.11(SeeAppendix1).Thisbillaimedtoaddresstheissue of scarce private capital for investment available for the development of the iron and steelindustrybyestablishingastatutoryparastatalorganizationtoprovidenotonlyinexpensivesteel,byreplacingcostlyimports,buttocreatejobopportunities.vTheactmadeavailabletotheIscorBoardatotalcapitalsumofUS$839million(in2015prices).IscorwasestablishedasaGovernmentownedcompany in1928andused thecapitalallocatedby theGovernment tobuild itsPretoria integratedsteelplant,whichwascommissioned1934.ThesiteforIscor’splantinPretoriawasselectedduetoits close proximity to large deposits of iron ore and coking coal and being close to the principalmarketforitsoutput.viTheregionhadalreadybeguntoindustrializepriortotheestablishmentofthePretoriaplantasaresultoftheexpansionofthegoldminingindustryintheTransvaal,anditwastheminingindustrythatcreatedthemarketforPretoria’ssteel.ThePretoriaplantwasfarmoreefficientthanUsco’sNewcastleplant,resultingintheshutteringoftheNewcastleblastfurnacethatsameyear.Thenextmajorboosttotheironandsteelindustrycamefromincreaseddemandforsteelfromthegoldminingsectorduetoagoldboombeginninginthe1930’s.

IronandSteelIndustry1930-1950

Expansionofgoldminingactivitiesinthe1930’sledtoagreatincreaseindemandforironandsteel,withdomesticsteelconsumptionmultiplyingthreefoldfrom1932to1937.Thegoldminingsectorofthe Transvaal relied on the iron and steel industry for primary and semi-manufactured products


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(such as cast iron bar, ironfasteners, piping, rails, ties,sleepers, steel sheets,structuralsteel,wire,fencing,grates, and posts) as well asfinished manufacturedproducts (such asmachineryspares,handtools,rockdrills,buckets, and shaft rollers).viiBy 1937, the RSA producedone-third of the ~870,000tons of iron and steelconsumed domestically, withIscor accounting for 92% ofthis production.viii This wasindicativeof Iscor’sroleoverthe next few decades duringwhich it remained thedominantRSAproducer.Alsoin 1937, the African MetalsCorporation (Amcor) wasformedasasubsidiaryofIscorafterthediscoveryof ironoreat Thabazimbi. The objectivewasforAmcortotakecontrolofthedefunctNewcastleblastfurnace, which was broughtbackonlinebyAmcorin1938,and use ore from the newlydiscovered deposit atThabazimbi as feedstock forpig-ironproduction.

By 1940, the RSA wasproducing three-fifths of itsdomesticdemandforironandsteel. There is no record ofiron or steel exports prior to1950. The sector wascharacterized by significantgrowth, being stimulated bywar-time demand for steelplate required for ship repairs, growth of local manufacturing industries and post-war domesticconstruction.Inresponsetothiswartimedemand,Iscordecidedtobuildanewintegratedsteelplantin Vereeniging. The company began by building a plate rollingmill, sited in such amanner that itcould later form part of a large integrated steelworks. The construction of the plate mill wascommissionedand in1943andcompleted thesameyear.ixThedoublingof totaloutputduring this

ThisgraphwascreatedusingdatasourcedfromtheSAIronandSteelInstitute

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SteelProductionvs.ImportsandExports

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period was achieved through implementing standardized mass-production processes and wascharacterizedbythedevelopmentofferroalloyandspecialtysteelproduction.Shortlyafterthewar,IscordecidedtomoveforwardonitsplanstobuildafullyintegratedsteelworksatVanderbijlpark,withconstructionbeginningonthisprojectin1947.xBy1949,thePretoriaplantwasresponsibleforproducing~450,000metrictonsperannum,equivalenttonearlythreequartersofalltheRSAsteeloutput(~600,000tonsin1950)asshowninGraph1above.xiThisisindicativeofthedominantrolethatIscorplayedintermsoftheoverallproductionoftheSouthAfricanironandsteelindustry.

IronandSteelIndustry1950-1980

1950markedanimportantmilestoneintheevolutionoftheRSAironandsteel industry; itwasthefirstyearwithexportsofsteelfromthecountry.Whileexportsaccountedforonlyalittleover1%oftotal production in 1950, they had grown to nearly 12%of total production by 1959, as shown inGraph 2. The 1950’s continued to see growth of the the RSA iron and steel industry with Iscorexpanding its operations further. In October of 1952, Iscor’s fully integrated steelworks atVanderbijlpark officially opened, with several of the new production units being commissioned in1953.Thiswasfollowedbymajorexpansionprojectsin1956andin1960.xii

From 1964 to 1969, Iscorexpanded its steel production inVanderbijlpark through thecommencement of a seconddevelopment phase. Thisexpansion was characterized bytheadditionoflargersteelrollingextensions, while olderproduction units weremodernized to supply higherqualityandvalue-addedproducts,such as electrolytic tinplate, forthe canning and beverageindustries. Inaddition,Newcastleand Pretoria entered intodownstream joint ventures withsteel processors. Anotherimportant development was theestablishment of the HighveldDevelopment Company in 1964,whichembarkedonaprogramtobuildan integrated ironandsteelworksnearWitbank.Thiswasachievedwith thebackingofAngloAmerican,which financed thebuildingof theHighveldplant toproduce steel as a by-product of vanadium. The establishment and entrance of Highveld into themarket is significant because it marks the first point that Iscor had to face competition from aprivately owned domestic producer of steel. The industry became further diversified in the mid-1960’swhenBarlowRandentered into thesteel industrywith theestablishmentof itsMiddleburgSteel and Alloys plant. The addition of newly established steel makers and the expansion ofproductioncapacityduring thisperiod resulted in thedoublingof steeloutput from1960-1969,asshowninGraph3above.


Graph3.


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Much like the1960’s, the1970’sweremarkedby expansionof productionby Iscor. In1971, IscorbeganerectingintegratedsteelworksandlongproductsmillatNewcastleinanefforttoexpanditsproductioncapacity.Anotherdevelopmentcamein1975,withtheMiddleburgworksbeingconvertedtotheproductionofstainlesssteel.ThecontinuedexpansionofproductioncapacitybyIscorresultedinasignificantincreaseinsteelproductionfrom1970to1980,asdepictedinGraph4.Whatisalsonotableisthatthisincreaseinproductionservedinalargeparttoproducesteeldestinedforexport,as there isastrongcorrelationbetweenthe increase inproductionandexports.Probably themostsignificant development during the 1970’s, with regard to the iron and steel industry, was theconstructionofrail infrastructure,whichallowedtheRSAto transport ironore fromthe inlands totheportsforexportpurposes.TheSishen-Saldhanarailcorridor,forexample,ledtoIscorbecomingasignificantglobalexporterofironore.

Followingthe1970’s,IscorcontinuedtodominatetheSouthAfricanironoretosteelvaluechainformany years, entering into joint ventures with private partners in specific sub-sectors until it wasprivatizedinthelate1980s.

PrivatizationofIscor

Theeconomic sanctions imposedon theRSA in1985due to theongoingpolicyof apartheidhadahuge impact on the South African economy and iron and steel sector. The sanctions, imposed byEurope, Japan, and the USA, not only cut off foreign direct investment (FDI) and loans, but alsoresultedinseverelossesduetorestrictionsonexports,mostsignificantlyoncoal,iron,steel,andfruit.Economistshaveestimatedthatfrom1985to1990,thesanctionsresultedin$US14billionworthoflossesintheformofloansandFDI,whilerestrictedexportswereestimatedtohaveresultedinlossesof $US 3.6 billion.xiiiThe resulting economicturmoil created political pressure for theNational party to shrink the public sector andbegin privatizing state assets. By the late1980’s, there was a significant movementtoward the privatization of state ownedenterprises in the RSA. This, in conjunctionwiththeeconomic impactofthesanctionsanda general sentiment that both political powerand economic control had become overlycentralized in the Government resulting in abloated, mismanaged public sector, led theNationalpartytowardsapolicyofprivatization.In 1988, a new policy was presented thatforesaw the privatization of state assets,including the electricity company, postalcompany, public transit, Iscor, and variousextractive industry companies. In 1989, theRSA privatized Iscor through a listing on theJohannesburgStockExchange.

Thevaluationof the saleof Iscor shareswasaroundUS$3.76billion,which injectedmuchneededfunds into the Government coffers. By 1990, Iscor shareholders were increasingly dominated byinvestmentinstitutions,withtheInvestmentDevelopmentCorporation(IDC)beingthesinglelargest

IronOre

With regard to iron ore production andbeneficiation, theRSAhasan advantageoverotheroreproducersduetothefactthatthemajorityofthedomestic iron ore deposits produce both highquality lump and high-grade sinter fines. The RSAproducesnearly5%ofglobalexportsandisranked7th in the world among producers of iron ore,makingitasignificantworldplayer.1By2013,SouthAfrica’s iron ore production accounted for 73% ofAfrica’s total production and for 72% of Africa’stotalexportsofironore.Thelackofinfrastructureisthe largest constraint for the expansion of iron-oreproduction.In2014thetheRSArailwaycapacityforiron-ore was 60 million metric tons per annum.Transnet, the national railway company, plans toraisecapacityonthelineto105millionmetrictonsperannum.TheupgradesarepartofTransnet’s210billion-rand(US$19.9billion)plantorevampitsraillinesafterdecadesofunderinvestment.1


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shareholderwitha16%stake.WhiletheNationalpartywaspushingforprivatization,manyviewedthe actions as a vehicle that the white Government was using to transfer national assets into thehands of a fewwealthywhites. The increasingly influential AfricanNational Congress (ANC) partybelievedthatthebestcourseofactionforthebettermentofAfricanswastheexactoppositeof thispolicyofprivatization;theANCwaspushingforgreaternationalizationinallsectors.WiththeANCcomingtopower in1994, theplanstoprivatizestateassets furtherwerestopped,withIscorbeingone of the fewGovernment assets to be fully privatized. TheGovernmental policy shift, led by theANC, led towards greater Government intervention in the mining sectors, with the objective offostering increased beneficiation and downstream activities that would result in job creation andindustrialgrowth.

ContemporaryIronandSteelIndustry

Shortlyafterprivatizationin1989,Iscorbegantostreamlineitoperationsthroughtheshutteringofinefficient facilities andwith initialworkforce reductions amounting to over 2000 employees. Theperiodof1989to1996wasarelativelyprosperoustimeforIscor.Iscorfurtherreduceditsworkforceandincreasedproductioncapacity.DuringthistimeIscorcontinuedtoenjoytariffprotection,whichresultedindomesticmarketconditionswheresteelsoldforapremiumofapproximately100%oftheworldprices.xivGrowingprofitability,combinedwithastrongworldstainlesssteelmarket, ledIscortosolidifyplansin1994toconvertthePretoriasteelmilltostainlesssteelproduction.InadditiontotheconversionofthePretoriamilltostainlessproduction,IscorandIDCinvestedinastateofthe-artsteelplantandcontinuousthinfilmcastingfacilityatSaldhanatobecommissionedin1999.However,by1997theworldstainlesssteelmarketcollapsedand,despitehavinginvestingupwardsof$US280millionintheconversiontostainlessproduction,IscorconvertedPretoriabacktoproducingcarbonsteel. In 1998 Pretoria was fully decommissioned due to its obsolete and inefficient carbon steelproductiontechnology.Thisdecisionwasdrivenbyadownturnintheworldsteelmarketthatbeganin1997,with Iscorreportingsubstantial losses inFebruaryof thatyear.With theshutteringof thePretoriaplant,Iscorwasabletorealizeprofitabilitybyearly1998,butbeganpostinglossesagainin1999.ThiswasasaresultofadropindemandfromtheFarEast,followingthefinancialcrisis,aswellas dumping of surplus production by Japan, Korea, and the Commonwealth of Independent States(CIS).xvBymid-1999, Iscor announced that itwas looking for an international partner for its steeloperations.xvi

ThenewmillenniumsawthetheRSAironandsteelindustryundergosignificantstructuralchanges.InAugustof2000,Iscorannouncedthatitwouldbesplitintosixseparatebusinessunitsinordertogenerate themaximumvalue for shareholders, and thusopenedup thepossibility formergersandacquisitions.Thesixbusinessunitsweredesignatedas flatsteelproducts, longsteelproducts,coal,iron ore, heavy minerals, and base metals.xviiIn early 2001, Iscor announced it would split thecorporation into two independent steel and mining companies. A major force driving thisrestructuringwas the fact that the50/50 IDC jointventureatSaldhanawasresulting insignificantlosses.Iscor’sverticallyintegratedoperationswereunbundledinNovember2001inordertospinofftheminingassets,whichbecameknownasKumbaIronOre(KIO).Includedinthedealwasanannualallotmentof6.25milliontonsofKumba’sironoretobeprovidedtoIscorforitssteelproduction.By2002,thesteelmarkethadreboundedandIscorwasagainreportinghealthyprofitswithitsSalhdanasteelmill finallygainingprofitability.LNMMittal tookacontrollingstake in Iscor in2004. In2005,KIO further unbundled itself, separating its coal mining and other mining assets into a separatecompany.AngloAmericanretained66%ofKIO,and17%ofthenewlycreatedcoalcompany.OthershareholdersinKIOincludetheIDC(14%)andminorityshareholdersaccountingfora20%holding.


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IPPandCompetitiveness

The issue of uncompetitive pricing of intermediate inputs directlyrelates to the perceived detrimental effect that using import paritypricing (IPP) for the pricing of manufacturing inputs produceddomesticallyhason downstreamactivities that relyon those inputsfor production. In the case of South Africa, IPP is a pricing policyadoptedbysuppliersofagoodfortheirsalestodomesticcustomers,accordingtowhichprice issetattheopportunitycostofaunitofanimported substitute good. As such, price is set equal to the worldpriceconverted intoRand,plusanytransport, tariff,andother coststhe customer would bear if importing.1What this means is that apricecalculatedusingIPPisanotionalpriceanddoesnotnecessarilyreflect actual costs incurred by the supplier, while in reality asupplier’scostsmightbelessthantheIPP.Thisistheprimaryreasonwhy customers are unhappy about being charged an IPP price.Conversely, an import parity price might be lower than the costsincurred by a domestic supplier, in which case customers mightbenefit from IPP if supplierswere constrained to price at or belowIPP.1The bottom line is that IPP can serve as both a competitiveconstraint or a source of market power, making it challenging todevise a one size fits all policy instruments to address the negativeeffects that are associated with IPP. While IPP pricing is not assignificantanissuein2015as inwas2009whentheNGPdocumentwasreleased,IPPstillwarrantsattention.

Between2003and2010,AcelorMittalwasselling flatsteelproductson the domestic steel market at the IPP price. At the time, theycontrolled over 80%of thismarket in SouthAfrica. They employedIPP pricing despite the fact that they had a comparative advantageover importedsteelduetothefactthattheywerereceivingironorefromKumba at costplus3%,which at the timewaswell below theworld market rate.While the Kumba iron ore deal was nullified in2010, AcelorMittal was able to make substantial profits between2003-2010 at the expense of the domestic downstream industries,whichreliedupontheAcellorMittal’s flatsteelproductsasinputs forproduction.ThispracticeofIPPwasinitiallybroughttolightin2002when Harmony Gold Fields, a South African gold-mining company,lodgeda complaintwiththeSouthAfricanCompetitionCommission.Harmony claimed that Mittal was charging excessive prices for theflat steel that Harmony used in its mining activities.1In 2004, theCompetition Commission dismissed the case, however HarmonyappealedthedecisionandMittalwasfoundguiltyofexcessivepricingand levied a US$ 100 million fine against the steel maker. Mittalappealed the decision and it was overturned in 2009; Mittal andHarmonysubsequently cametoaprivatesettlementoutof court.1ItisimportanttonotethattheRSAhadalreadypassedtheCompetitionAct of 1998 to specifically address issues related to price fixing,collusion, and monopolistic activities. Despite the fact thatAcelorMittal’s IPP pricing practices fell in direct violation of theCompetition Act, it took several years for the Government to takeaction.Beyondaddressingtheinefficienciesthathadarisenfromthepricing practices, the NGP offered recommendations pertaining tootherareas.

A merger ensued with the assets of the new coal entity being agglomerated with the assets ofEyesizwe Coal, with the resultingentity being listed on theJohannesburgStockExchange in2006asExxaro.xviii

All of the individual operations thatcomprisedtheformerIscorarestill inexistence, however all of the iron oreand steel production manufacturingfacilities are now owned andcontrolled by transnationalcorporations head-quartered outsideof the country. Anglo American,through KIO, has taken control of theSishen iron ore mine, South Africa’sbest iron ore asset. Luxemburg-basedArcelorMittal Steel owns the steel-making assets, making Exxaro, whichcontrols the former Iscor-owned coalassets, the sole former component ofIscor that is still under the control ofSouthAfricaninstitutionalcapital.

Along with the restructuring of thesteel industryduring the early2000’scameanotherpredominantthemethatresonatedthroughout thedecade.Theissueofunfairpricingof intermediaryinputs by AcellorMittal, through theuse importpriceparity (IPP) for itsproducts destined for the domesticmarket,wasaconstantcomplaint.Thisreoccurring theme consistently madetheheadlinesfrom2002-2010,asboththe the RSA Government anddownstream industries expressedtheir discontent over the negativeeffects thiswas having on theminingandmanufacturingsectorsoftheRSA. In the event the Government was to regulate the price at which domestic steel producers are able to sell steel in South Africa, this would, in all likelihood, discourage steel producers from maintaining their current production capacity. See the IPP andCompetitivenessboxformoredetails


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regardingthisissue.TheissueofIPPwasaddressedtowardstheendofthedecadethroughconcertedefforts by the Government to stamp out the practice in the beneficiation framework that theGovernmentbegantoformulatein2009.xixWhilevariousformsofironorebeneficiationhavebeenoccurringintheRSAsincethebeginningofthe20th century, theelectionofPresident JacobZuma in2009wasmarkedbyhis call toaction: tobreakwith theprior twodecadesofeconomicpolicyandchartaneweconomicpath forward.Thisideawasfomentedintheformofthe“NewGrowthPath”(NGP)releasedin2011bythenewlyformedEconomic Development Department (EDD) with the intention as serving as the framework foreconomicpolicyandthedriverof thecounty’s jobsstrategy.Duetothesignificantrole thatminingplays in theRSA’seconomy, theNGP focusedon increasedbeneficiationacrossall sectorswith theobjective of creating jobs through downstream and resulting side stream activities. The NPG wasviewedasaframeworktoaddresstheconstraintsofbeneficiationinSouthAfrica,suchasrestrictedaccesstorawmaterialsandlackofcriticalinfrastructure.

Specifically, the NGP suggested that a state-owned mining company should be established, whichpromotes beneficiation and greater utilization of the mineral resource base of the country fordevelopmentalpurposes,includingthroughasovereignwealthfund.Inaddition,theNGPsuggestedthat refocusing the beneficiation strategy to support further downstream activities, such asfabrication rather than only smelting and refining, which are both capital and energy intensive.Furthermore,NGPstressedtheimportanceofstrongermeasurestoaddressuncompetitivepricingofintermediateinputs,suchaswhereappropriate,aswellasexporttaxesonselectedmineralproductslinked to clear industrial strategies.xxThe NGP also pointed towards a review of the existingregulatory framework, including measures surrounding licensing with the potential for a newlyestablishedstate-ownedminingcompany (mentionedabove) to support jobcreation,beneficiation,investment,andbroadequity.

In addition to greater oversightover the issuance of mininglicenses, the NGP identified thecreation of a long-termplan forindustrial development as ofsignificant importance. Theheart of this was a ten-yearstrategic plan addressed issuessurrounding electricitygeneration,logistics,andhumancapital specialized formining.Akey component to this strategicplan is to identify the mainpotential for and blockages tostage 4 beneficiation(fabrication of metals into finalgoods)anddevelopmeasurestoaddress them, including exporttaxes on metals where appropriate. xxi According to a study by KIO in 2011, even

Graph4.


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aggressive input cost subsidization/steel price control in South Africa would only create 1-3% of additional downstream steel demand. Furthermore, interventions to reduce domestic steel prices by 10-15% would only generate a 1-3% increase in downstream consumption of steel. Considering that current domestic consumption is only at 50% of production capacity, a 1-3% increase in consumption would not have much of a direct or indirect impact on employment numbers. Even if iron ore were supplied free to steel producers (with a concomitant lowering in the steel price), it would only yield a 0.7-1% cost benefit to downstream producers.xxii The Anglo KIO report suggests that the best option for creating both direct and indirect employment is the development of new iron ore mines and infrastructure in the Limpopo and Northern Cape provinces. AnotherkeytenantoftheNGPwasthecreationofaspecializedstateownedminingcompanytoserveasbothaplayerandareferee.However,asofAugust2015theonlyestablishedstateownedminingcompanywasAfricanExplorationMiningandFinanceCorporation(AEMFC).TheAEMFC,asubsidiaryofState-ownedCentralEnergyFund(CEF)group,wasestablished in1944(butrevived in2007)tosecureSouthAfrica’senergysupply,primarily through theminingandsupplyofcoal forelectricitygeneration.TheAEMFCalsoenvisionssecuringotherkeymineralsforbeneficiationintheenergyandsteelvaluechain,buthasyettomakeanyinroadsinthisdepartment.xxiiiInAugustof2014,theRSAMinistryofMiningannouncedthesubmissionsof theState-ownedMiningCompany(Somco)Bill toParliament.All of the coal rights currently inAEMFCwill be transferred into SOMCO.AsofAugust2015,thedetailsofSomcowerestillunknowntotheminingsectorandthepublic.

RecenttrendsintheironandsteelindustriescanbeseeninGraph4aboveandGraph5below.Whatis most instructive about theses graphs is that, while iron ore production and exports have beenexperiencing an upward trend, domestic steel consumption and domestic steel production havestagnated.WhileoverallcrudesteelproductionintheRSAhasbeenexperiencingadownwardtrendoverthepastdecade,asillustratedinGraph5below,thereweredevelopmentsin2014surroundingthesteelindustrythatsuggestedthere could be an increase inannual production on thehorizon. Most significantly,Chinese owned Hebei Iron andSteelannouncedinlate2014itsplanstobuildaplantintheRSAthat will have an annualproductioncapacityof5millionmetric tons of steel, with thebulk of production beingdedicated to structural steel.Through the terms of theagreement, Hebei will take a51% stake in a joint venturewiththeIDCoftheRSAandtheChina-AfricaDevelopmentFundtobuildwhatwouldbeChina’sbiggestoverseassteelmill.xxiv

Despite the prospect of new

Graph5.


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production capacity coming online as a result of the Hebei deal, the South African iron and steelindustry found itself in dire straights in 2015. This situation stemmed from depressed pricesassociatedwith an oversuppliedworld steelmarket and further compounded by stiff competitionpresentedintheformofcheapChineseimports.In2009,7%ofSouthAfrica'ssteelwasimported,butby2015thisfigurehadrisento30%,withthemajorityofthoseimportsbeingfromChina.xxvByJuneof 2015, the SouthAfrican steel industry appeared to be on the verge of collapse. In July of 2015,ArcelorMittal announced that itwas considering closing its century-oldVereeniging steelworks. Inaddition, Evraz Highveld Steel, the RSA’s second largest producer, which is already undergoing abusiness rescue due to running out of operating capital, announced it was laying-off half of itsworkforce, over 1000 employees temporarily or possibly permanently.xxviThe crisis is resonatingthroughouttheironandsteelindustryintheRSA,withdownstreamproducersalsohavingtomakehardchoices.Forexample,TridentSteellaidoff700workersandMacsteelhasproposedthelayoffof600employees.

In August 2015, in response to the ensuing crisis, the Government joined forces with the steelindustryandtradeunionstoformanemergencytaskforcetoaddressthediresituation.Atstakeisover190,000jobsassociatedwiththeironandsteelindustryandtheimpendingclosureofthebulkofsteelproducersoperatinginSouthAfrica.xxvii

Thenon-Governmentalstakeholdersthatcomprisedthetaskforcewere;UnitedAssociationofSouthAfrica,theMetalandElectricalWorkersUnionsoftheRSA,ArcelorMittaltheRSA(AMtheRSA),theSteel and Engineering Industries Federation of Southern Africa (Seifsa), National Union ofMetalworkersoftheRSA(Numsa),EvrazHighveldSteel,CapeGate,theScawMetalsGroup,MacsteelCoilProcessingandSolidarity.xxviii

ThecoredemandsthegroupmadeintheirappealtotheGovernmentincluded:

• Immediatetraderemediesforsteel(10-15%Tariffonsteelimports)• Urgentroll-outofGovernment'sinfrastructureprograms(tostimulateconsumptionof

domesticallyproducedsteel)• Transparencyofcurrentstate-ownedenterprises'capitalprograms(forceenterprisestobuy

domesticsteelproducts)• Monitoringofimports(lookforimportsagainstwhichdumpingcasescanbelevied)• Banningofsteelscrapexports(guaranteessupplytodomesticindustryatlowerprice)• FairpricingforsteelversusImportPriceParity(SeeIPPandCompetitivenessAbove)

The Government was represented by the Trade and Industry Minister, Economic DevelopmentMinister,andseniorGovernmentofficialsfrompublicenterprises,tradeandindustry,transport,andtheNationalTreasury.TheleadershipofTransnetwasalsoinattendance.ThusfartheGovernmenthasagreedtosignoffontheimplementationofimportdutiesataninitialrateof10%.Furthermore,ArcelorMittalagreedtojointheGovernmentininvestigatinganti-dumpingmeasures.

KeyConclusions

The RSA iron and steel industry enjoyed relative success and growth from its inception in thebeginningofthe20thcenturyuntiltheworldeconomiccrisisof2008.Its initialsuccessesappeartostem from several factors, including domestic availability of coking coal and iron ore, targetedGovernmentalintervention,andtheexistenceofadomesticmarketforironandsteel.Itisimportant


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to note that in recent history the RSA has had to import coking coal as its remaining reserves ofcokingcoalareundeveloped.

Governmental interventionwas adefining factor in thedevelopmentof the SouthAfrican iron andsteel industry from very early on. This intervention came in the form of Government incentives,protectionist tariffs, and through the passage of The Iron and Steel Industry Act in 1928, whichestablishedIscor.However,withouttheexistenceofarobustdomesticmarketitisunlikelythatthetheRSAironandsteelindustrywouldhaveflourishedasitdid.Thedemandsoftheminingindustryhelped toprovide a stabledomesticmarket for steel,while thenatural protectionprovidedby theRSA’sdistancefrominternationalsteelproducerswasinitiallyanaddedadvantagethatbecamelesssignificant over time as transport costs fell. While this natural protection and reliance upon thedomestic/regionalmarketshelpedtoestablishtheindustryandsustaineditformanydecades,itdidnotprepare theRSA to compete in theglobalmarketplace.The industrywas structuredandgrewwiththemainobjectiveofprovidingsteeltothedomesticandregionalmarkets.Asthesteelmarketbecame more globalized and the RSA had to compete with imports, it became evident that theindustrywasnotcompetitiveenough.

Amajorfeatureofthe1980’sthathadahugeimpactonthefutureoftheSouthAfricanironandsteelwas the political and economic climate that led to the privatization of Iscor in 1989. While theNational party was pushing for privatization, many viewed the actions of the Government withskepticism. The increasingly influential ANC party believed that the best course of action for thebettermentofAfricanswastheexactoppositeofthispolicyofprivatization;theANCwaspushingforgreaternationalizationinallsectors.WiththeANCcomingtopowerin1994,planstoprivatizestateassetsfurtherwerehalted,withIscorbeingoneofthefewGovernmentassetstobefullyprivatized.Theprivatizationof Iscorhascontinuedtobeviewedby theANCasdetrimental to the interestsofSouthAfricansbecauseitallowedstrategicassets,suchassteelproductionandtheShishenironoremine, to fall into the hands of foreign interests, thus exposing downstream industries reliant onassociatedinputstopricegouging.Thisissuewassoextremethatby2007theGovernmentandtheIDC began exploring the possibility of starting another state owned steel producer to counter thepracticeofIPPthroughdirectcompetitionwithAcellorMittalRSA(formerlyIscor).

By2009,theGovernmentrecognizedthattheeconomicpathofthepasttwodecadeswasnotintheRSA’sbestinterestandthuscamethecreationoftheNewGrowthPath(NGP).ThepolicyofincreasednationalizationwasmadetheofficialeconomicpolicythoughthecreationoftheNGP.However,notmuchhasbeenaccomplishedlegislativelyandtherehasnotbeenanysignificantmeasurablepositiveimpact in termsof economic growth, diversification, or increase in iron ore beneficiation activitiesstemmingfromtheNGPframework.TheeconomicsituationofthetheRSAironandsteelindustryisso bad that, as of August 2015, all sectors of the ore to steel value chain, frommining to finishedproducts,wereexperiencingmoderatetoheavylayoffs.

As of August 2015, the future of SouthAfrican iron and steel industry appear bleak, at least in itscurrent incarnation. While the Government, industry, and labor are acting in chorus to avert a mid to long-term crisis in the industry, it appears that over the short-term the industry will suffer with initial estimates of closures and layoff amounting to 10,000 jobs and could balloon to over 50,000 before the situation stabilizes. The last quarter of 2015 into the first two quarters of 2016 will likely be a defining period for the long-term structure of the South African iron and steel industry.

The South African steel industry faces significant challenges that make the growth prospects in this step of the value chain very challenging. Specifically, the RSA steel producers have an overcapacity of more than


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50% relative to domestic demand. The steel industry faces high labor costs relative to low cost global competitors, as well as the high cost of some imported inputs, such as coking coal. Furthermore, the RSA faces geographic disadvantages, meaning that the cost of transporting steel from the inland production facilities to the coast and then by sea to the relevant export destination are likely to make South African steel uncompetitive in the relevant export destination. On top of rising energy costs, the RSA’s steel mills are located inland necessitating that steel exports be transported via rail to ports, and thus incur high logistics costs on inland freight. In addition, South Africa is located further from the principal steel importing countries than other steel producing countries, such as South Korea, the Ukraine, and China. All of these factors combine to make further viable development of the RSA steel industry unlikely.


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Appendix

Existing enabling policy and regulatory framework

Beneficiation is a widespread policy paradigm in South Africa. As such, it is rooted in various policies and frameworks as well as a number of strategic and orientation documents. Below is a review of the main laws that enable beneficiation in South Africa.


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The Columbia Center on Sustainable Investment (CCSI), a joint center of Columbia Law School and the Earth Institute at Columbia University, is a leading research center and forum dedicated exclusively to the study, practice and discussion of sustainable international investment (SII) worldwide. Through research, advisory projects, multi-stakeholder dialogue and educational programs, CCSI constructs and implements an investment framework that promotes sustainable development, builds trusting relationships for long-term investments, and is easily adopted by governments, companies and civil society.

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