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The Industrial Development Corporation (IDC) decided some time ago that it couldn’t sit back and watch South Africa’s manufacturing sector implode; it had to roll up its sleeves and actively get involved in rescuing and reinforcing it.
This is according to Abel Malinga, the executive in charge of mining and metals industries at the IDC, who says the strategic shift – from mere facilitator of development finance to proactive participant in the economy – was imperative if the country wanted to arrest its slide into deindustrialisation.
“We needed to be more proactive and have a better understanding of the sector. Our economy is part of the global village, so our sectors also have to be globally competitive.”
The development finance agency is stepping in to spur the export of local expertise and machinery to the growth market that is Africa, while nurturing the local automotive sector, and ensuring that upstream and downstream steel operations modernise and innovate to survive and become competitive.
“As a division, we want to be at the centre of economic growth and transformation of the economy,” he says. “Because being at the centre means you’re able to look in all directions. If you look at the constraints facing industry, we have to look at what government can do to unblock those constraints.”
It’s no secret that mining and metals are under immense pressure in South Africa. The steel industry in particular – “the lifeblood of any industrial economy” – is under threat from cheap imports resulting from a global oversupply of the metal, and mines are downsizing, shelving plans for expansion or closing down altogether as the global commodities slump continues.
That’s why Malinga’s division is focusing its energies on two areas to help industrialise the South African economy. One of these is localisation. “There are a lot of important products we have the opportunity to produce, but we are not competitive,” Malinga says. “We need to address that aspect of the downstream value chain [the processing of raw materials into final products].”
The second focus area is working with existing players to modernise operations and ensure their competitiveness – and encourage government to procure as many local products as possible for its infrastructure projects.
The steel industry requires special intervention, in part because the country has lagged behind global steel developments, and energy and logistics costs have skyrocketed while environmental concerns have taken
centre stage.
The IDC has been stepping in to stop pockets of deindustrialisation from plaguing the South African economy, with the purchase of Scaw Metals and Palabora Copper being cases in point.
Scaw Metals, which makes specialised steel products serving the mining, construction, railway and other industrial sectors, was sold by Anglo American during its unbundling process.
The IDC sees its acquisition of a 74% stake as helping to ensure that steel is competitively priced in the local economy and that the local beneficiation of natural resources is promoted.
The survival of the company preserved 7 000 jobs and means that the specialised products that Scaw makes from recycled local scrap metal and iron ore will not need to be imported.
The Palabora Copper mine in Limpopo was threatened with closure a few years ago, sparking fears that Phalaborwa would become a ghost town. But thanks to an investment by the IDC to modernise the smelter’s production facilities, its life span has been extended by at least 20 years.
Abel Malinga, the IDC executive in charge of mining and metals industries, explains: “The copper smelter was established 50 years ago and the technology used was old, and neither environmentally compliant nor efficient.
“But it’s the only copper-smelting facility in South Africa and, if it had closed, our copper would have had to be exported to be refined – or we would have had to import copper rods.
“So, we took a conscious decision to become part of the consortium acquiring the asset to slow down the deindustrialisation of the economy. By investing R600 million, we saved 1 000 jobs and ensured that the facility complied with environmental standards.
“It was about protecting jobs and ensuring that the beneficiation of copper concentrate continues locally.”
But South Africa is Africa’s largest steel producer and it is estimated the primary steel sector contributes R140 billion to the economy, as well as more than 322 000 direct and indirect jobs. And downstream industries, which use steel as an input, employ a further 1.3 million people.
This means that if this sector implodes, it will place immense strain on an economy already hamstrung by the “triple crisis” of unemployment, poverty and inequality, made worse by sluggish economic growth.
With the recent closure of Highveld Steel and the loss of more than 3 000 jobs, it’s not overstating the case to say the South African steel industry has “one foot in the grave”, says Malinga.
Given this backdrop, the IDC felt it necessary to step in to temporarily protect the primary steel industry – but this does not include regulating steel pricing, which should be determined by the markets, he points out.
Malinga says his division has adopted a value-chain approach to funding the steel industry, recognising that there are opportunities for economic activity at all stages in the linkages between the upstream (raw materials extraction) and downstream (processing) sectors.
And, with roughly half of the local demand for metals currently being met by imports, one of the main challenges, Malinga says, is how to go about replacing these imported goods with locally produced products.
“That’s why in our value chain we have to produce final products, not just mining and exporting our raw materials, such as iron ore. Our intention is to add value to commodities – so we can export value-added products as well as sell them locally.”
Malinga adds: “Ours is not just a funding role, but one of working with industry to find solutions to make the upstream industry more competitive, while making sure we don’t harm the downstream industry.”
The IDC is helping steel companies to reduce costs internally and improve their productivity by investing in new technology to become environmentally friendly, energy efficient and, ultimately, more competitive.
However, there are “pockets of steel industry growth”, he adds. The automotive sector, for one, is doing well, and the IDC wants to help boost the number of vehicles assembled and produced in South Africa, while increasing the local content used in those cars.
“We have identified the automotive sector as one of the important parts of the steel value chain where we can have a major impact.”
And, he says, many other opportunities lie in South Africa’s proven track record in manufacturing machinery and other products, which can be exported for use in mining, construction and infrastructure projects on the continent.
“We have the expertise, plus close proximity to that market – and we can provide after-sales service,” he says.
“Mining operations can’t afford stand time, and we have an opportunity as South African business to service the mining and construction industry on the continent. People say it’s difficult to do business on the continent, but it’s just that the operating environment is different. We have to modify the way we do business to take into account the peculiarities.
“And South Africa’s financial services sector is well established, so doing business here is much easier than it is on the continent – for example, in terms of obtaining credit. Yes, there are huge opportunities. We haven’t taken full advantage of the African market.”
He is animated about the IDC’s role in helping to transform South Africa into a manufacturing economy and “a force to be reckoned with”.
“We need to address issues related to a lack of competitiveness, and create opportunities for business amid local uncertainty.
“It’s not about the amount of money we invest, but the catalytic role we can play. We see the South African economy from a bird’s-eye perspective, and can see where the bottlenecks and constraints are.”
Adds Malinga: “There are also opportunities to create new manufacturing capacity for new entrepreneurs. A key focus area for us is to support black industrialists [especially in the coal sector] and emerging businesses.”
He says his division is keen to engage with entrepreneurs, especially in the steel industry, about their plans to set up new factories or expand their existing operations.
