Africa’s Growing Steel Industry

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Providing steel for Africa’s growth

Steel comes from iron ore and South Africa is the seventh-largest producer of iron-ore and has also traditionally been the fourth largest exporter worldwide, feeding the fast growing Chinese economy.

Though Africa is arguably the most endowed continent in the world when it comes to mineral wealth one would be mistaken to think otherwise given the low production and consumption of most mining production. Take the example of steel. Steel comes from iron ore and South Africa is the seventh-largest producer of iron-ore and has also traditionally been the fourthlargest exporter worldwide, feeding the fast growing Chinese economy.

A focus on exports has meant that despite the fact that Africa does produce iron ore, it’s consumption of crude steel has been pegged at a mere 2 percent of global consumption while producing just about the same percentage of crude steel. Steel is essential in both construction and industry as a whole and Africa’s low consumption is an indicator of her poor economic health.

The picture is not as grim as it appears because with GDP growth figures in the range of 5 percent, this is fast changing and this is evident from the growth in the steel rolling industry which is a logical entry point into establishing an end to end steel industry.

But what has fueled this growth in the steel industry? Indicators point to the global economic crisis which has presented Africa with a silver lining as the last few years of loose monetary policy in the West has made Africa more attractive as an investment destination spurred by attractive return to be made in housing and infrastructure development.

This truth can be found in foreign direct investment(FDI) into Africa with Ernst & Young forcasting that FDI will reach US$150 billion by 2015 from US$84 billion in 2010, driven by strong growth in new projects.

But what has fueled this growth in the steel industry? Indicators point to the global economic crisis which has presented Africa with a silver lining as the last few years of loose monetary policy in the West has made Africa more attractive as an investment destination spurred by attractive return to be made in housing and infrastructure development.

This truth can be found in foreign direct investment(FDI) into Africa with Ernst & Young forcasting that FDI will reach US$150 billion by 2015 from US$84 billion in 2010, driven by strong growth in new projects.

Trends

The upsurge in infrastructure development has driven demand for steel all across Africa resulting in more steel rolling mills either being established or upgraded to meet this demand. The mills produce galvanized wires, roofing sheets, nails and reinforcement bars for concrete while giving birth to other downstream industries which fabricate wheel barrows, farming implements and water tanks among a myriad of other products.

The establishment of the steel rolling mills has meant the creation of jobs both directly and indirectly while local production of finished steel products has meant that hard currency that would have gone into importing the products has been saved.

Take for instance the case of Nigeria where annual consumption is estimated at 1.5 million tons, this year a new steel rolling mill was established with a capacity to produce 65 percent of this consumption.

Western Metal Product Company Limited (Wempco Group) established the plant at a cost of US$1.5billion. Additional benefits that stemmed from this was the establishment of a gas fired electricity generating plant to meet the power needs of the plant with obvious benefits to the local community.

The trend in the East African region is the same. Kenya’s annual demand for steel is estimated at about 480,000 tons to 600,000 tons and it imports about 20,000 tons a month according to some estimates. Last year saw the establishment of a US$1.3billion plant in Mombasa to supply the local industry with 84,000 tons of steel per annum.

This added to about four other big names in the local industry. Statistics by the Trade ministry show that metals and steel products are currently Kenya’s largest manufactured goods exported within the Common Market for Eastern and Southern Africa (Comesa) and East Africa Community (EAC) regions. Here again reducing the steel import bill which stands at over Ksh5billion(US$60million) annually will be a great boon to the economy.

In Uganda Roofings Rolling Mills has upgraded its existing facilities with the establishment of a Pickling, Cold Rolling, Batch Annealing, Galvanizing and Color Coating plant at a cost of US$100million. The plant has a capacity of 150,000 tons per annum. Roofings Rollng Mills is now the largest plant of its kind in East Africa. (see story elsewhere in this issue).

In Uganda just as everywhere else in Sub Saharan Africa demand is growing and opportunities lie in both supplying the local market as well as satisfying regional markets.

With the development of the steel rolling industry the hopes of vertical integration into actually mining iron ore are almost a reality.
In Nigeria the new plant will depend on imported steel billets for raw materials until it can work out how to transport iron ore from Itakpe in Kogi State where it is mined.

In Uganda and Kenya where ore deposits have been discovered the governments are encouraging investments in mining of iron ore. In Kenya deposits of iron ore and limestone have been found in large quantities in Homa Bay, Kitui , Kakamega and Taita Taveta. In Uganda Roofings Rolling Mills is seeking to be granted a mining license which would enable it lower the cost of raw material while saving the country vital foreign exchange. Mining is currently not heavy with a government report on iron ore indicating that in 2009, the country produced 971.95 tonnes, down from to 3,794.74 tonnes in 2010.

In all these instances the inhibiting factors are the high cost of power and poor transportation infrastructure. Until this is sorted out limited progress is likely to be made.

Challenges

To establish a steel rolling mill in Africa one has to contend with the twin challenges of poor road networks and unstable power supply which increases the cost of doing business, however as more governments focus on eliminating these impediments by engaging in improving roads and investing in power stations these factors will play a less significant role in the future and offer better returns. Not forgetting the fact that the very development of infrastructure is a ready market for the mills products.

In addition to infrastructure challenges, cost of imported raw materials and competition from cheap low quality finished products also pose grave challenges. Perhaps the single most challenging factor however is the stiff competition from scrap metal export dealers.
The steel rolling industry relies heavily on recycling scrap metal but attractive export prices mean that scrap metal finds its way out of the country forcing mills to either pay more for the scrap metal or import it altogether.

In recent times this bruising battle between the exporters and the steel mills has been played out across the continent and the steel mills are winning. Countries such as Ghana, Nigeria, Ivory Coast, Kenya, Cameroun and Zimbabwe have passed legislation to ban scrap metals. In South Africa at the beginning of August the Department of Trade and Industry published the policy directive that gives the International Trade Administration Commission the power to regulate the exportation of scrap metal by barring exports if the metal has not first been offered for local beneficiation at a price discount of 20 percent.

The arguments advanced by the proponents of exports are that it creates jobs for idle youth and earns hard currency while the opponents say that it acts as a barrier to industrialisation while impeding the growth of auxiliary industries downstream. What is evident however is that the steel rolling industry is a critical pillar of job creation directly and indirectly.

A darker side to the scrap metal business on the other hand involves the theft of signage, manhole covers and cables which are then sold as scrap. In Kenya the local power utility looses almost 3000 transformers every year and about 200,000 metres of cable placing a heavy toll on the very infrastructure that is being developed.

Africa will need to accelerate the development of infrastructure if it is ever to fully realize its potential to become industrialized and reduce its reliance on imported steel products. The savings in terms of hard currency and the creation of semi-skilled jobs in the steel industry would far outweigh any benefits derived from being net importers of cheap steel product from the East.