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Trade and Investment South Africa - Customised Sector Programmes Priority Sector – Metals of 108

METALS SECTOR STRATEGY

METALS SECTOR DEVELOPMENT STRATEGY

_________________________________

© the dti Copyright, 2005

The text in this document (excluding the dti’s logo) may be reproduced free of charge in any format or medium providing that it is reproduced accurately and not used in a misleading context or used for commercial gain. The material must be acknowledged as the dti copyright and the title of the document specified. Any enquiries relating to the copyright in this document should be addressed to the Marketing Division, Private Bag X84, Pretoria, Gauteng, 0001 (Postal); 12 Esselen Street, Sunnyside, Pretoria, 0002 (Courier); 0861 843 384 (the dti Customer Contact Centre)

Beyond Planning to Action

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Contents

FOREWORD 4 ABBREVIATIONS AND SYMBOLS 6 Chapter 1 Introduction 8 Chapter 2 Sector Overview 12 2.1 Metals Industry Structure 12 2.2 Minerals and Metals Beneficiation in South Africa 13

2.2.1 Beneficiation and the Value Chain 14 2.3 Performance of Metals in South Africa : An Overview 18

2.3.1 Employment and Performance 19 2.3.2 Capital Investment Trends 20 2.3.3 Trade Performance 20

2.4 Main Stakeholders 21 2.5 Sub-Sector Analysis 22

2.5.1 Carbon Steel 23 2.5.2 Stainless Steel 26 2.5.3 Aluminium 30 2.5.4 Foundries 35 2.5.5 Metal Fabrication (Including Structural Steel) 39 2.5.6 Structural Steel Industry 42 2.5.7 Stainless Steel Consumer Goods (Sinks, Cookware) 43 2.5.8 Automotive Industry 43 2.5.9 Tank Container Industry 44 2.5.10 Jewellery 45

2.6 Cross-Cutting Competitiveness Issues 50 Chapter 3 Sector Strategic Plan 60 3.1 Strategic Vision 60 3.2 Longer-Term Direction 60 3.3 Key Strategic Challenges 60 3.4 Key Action Programmes 61 Chapter 4 Sector Implementation Plan 62 4.1 Strategic Theme A: Coordination and Leadership 62

4.1.1 Key Strategic Challenge: Lack of Coordination and Leadership 63 4.1.2 Key Action Programme 1: Establishment of a Sector Support Facility 63

4.2 Strategic Theme B: Beneficiation and New Investments 67

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4.2.1 Key Strategic Challenge: Uncompetitive Input Pricing in the Metals Sector 68 4.2.2 Key Action Programme 2: Establishing a Competitive Input Price Regime in the

Metals Sector 69 4.2.3 Key Strategic Challenge: Insufficient Beneficiation along the Value Chain,

Particularly on Downstream Industries 73 4.2.4 Key Action Programme 3: Promoting Beneficiation of Metals 73

4.3 Strategic Theme C: Demands from Government’s Capital Expenditure and Major Private Sector Projects 81 4.3.1 Key Strategic Challenge: Threat of Imports to Public and Private Capital

Expenditure Projects 81 4.3.2 Key Action Programme 4: Maximise Local Content through Backward Linkages

82 4.4 Strategic Theme D: Global Competitiveness 84

4.4.1 The Strategic Challenge: Surge in the Importation of Manufactured Metal Products 85

4.4.2 Key Action Programme 5: Establishing an Import Monitoring System 85 4.4.3 The Strategic Challenge: Low Productivity and Innovation 87 4.4.4 Key Action Programme 6: Upgrading Production Capabilities in Downstream

Industries 89 Chapter 5 Conclusions and Next Steps 100 5.1 Summary: Key Strategic Themes for the Metals Sector 100 5.2 Strategy Deliverables 101 5.3 Factors Influencing Successful Delivery 102 5.4 Next Steps 103 ANNEX 1 105

Government Websites 105 ANNEX 2 106

Bibliography 106

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Foreword

We have discovered that formulating a sector development strategy is not a simple undertaking. It has been an enriching experience but one that has once again made us aware of our own limitations in delivering against the national economic policy goals and objectives outlined in the Micro-economic Reform Strategy of 2002.

Priority sectors1 matter to South Africa. They account for over 22 per cent of the Gross Domestic Product, employ twenty-three percent of South Africa’s total employment, and contribute over 55 per cent to South Africa’s foreign exchange earnings. Therefore, the success of the priority sectors is critical to our economy and a better life for all.

The changing nature of the relationship between government and stakeholders in priority sectors means that we need to shift the dialogue from lobby to understanding and synergy. What we are experiencing through the Customised Sector Programme development and sector summit processes is a powerful and encouraging new way of working together, thus giving concrete content to the often rhetorically touted partnership between government and stakeholders. There are bound to be problems as we grapple with this learning. We are, however, excited by the prospect of jointly tackling South Africa’s economic challenges.

The fact-driven process employed within Customised Sector Programme, in our experience, represents the first attempt at generating a common understanding, rooted in objective analysis around key strategic challenges and opportunities facing the South African priority sectors, that leaves the path open to move beyond planning to action, jointly and/or independently, for all parties but based on a common vision.

This document outlines our sector development strategy for increasing competitiveness, exports and investments as well as employment and equity, in the priority sectors of South Africa. On the basis of objective analysis, strategic themes over the next five years have been identified. Each strategic theme demands government and other stakeholders to jointly seek the key action programmes and related interventions that must be implemented to deal with key strategic challenges facing the priority sectors.

This sector development strategy is neither hard nor fast nor a formula for instant success. Instead, we offer it as the basis for continuing to forge constructive engagement with stakeholders – a partnership based on best practice that must be effective at the national, provincial and sectoral levels.

Long standing challenges of competitiveness, exports and investments as well as employment and equity will not be solved overnight. However, concrete time frames to achieve our aim have been put firmly into place. Maximum cooperation from our stakeholders is a key condition to achieve our goals within this time frame. Firmer benchmarks against which to measure and report on progress have also been developed. 1 Chemicals, Business Process Outsourcing, and Tourism were highlighted by our President on 11 February 2005 during his State of the Nation Address for additional support because of their potentialWe also work with: Aerospace, marine and rail, Agro-processing; Automotives; Capital equipment; Cultural industries; Electro-technical; Metals; and Textiles, clothing, footwear and leather

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There are mistakes the government should avoid. Any attempt to manipulate the exchange rate would put our hard-earned macroeconomic stability at serious risk. Whilst we understand the strength of the Rand relative to the US dollar makes life difficult for our exporters, in practice we have to recognise that it is not possible for the Reserve Bank to pursue an exchange rate target at the same time as an inflation target.

Likewise, we reject solutions based on attempts to defend the economy from fair competitive pressures through restriction on trading with the world or subsidies to domestic companies. Such actions would detract from the market framework, which brings major competitiveness improvements. They would also run counter to the World Trade Organisation (WTO) and the benefits it brings to our exporters. As the opposite side of the same coin, we take robust action against countries that seek to deny our firms fair access to their markets. That’s why we, in conjunction with other developing countries, fought strongly for a new world trade round in Doha.

Although Customised Sector Programme is nationwide, there is an important role for the provinces, we recognise that provincial leadership is essential in creating dynamic provincial economies and closing the gap between and/or within provinces. Hence the importance we attach to the provincial economic departments.

This document has been developed on the basis of discussions within the Customised Sector Programme Project Team that we established at the beginning of the year, including the positive work of the partnership forged through the inter-Government and external stakeholder workshops. Customised Sector Programme must deliver real outcomes, underpinned by real commitment from all stakeholders. Above all we hope that this sector development strategy and programmes will form the basis for an even stronger partnership and more effective action in support of priority sectors in South Africa.

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Abbreviations and Symbols

$ US Dollar EXBO Executive Board ACA Aluminium Casters Association FDI Foreign Direct Investment AFSA Aluminium Federation of South

Africa FRIDGE Fund for Research into Industrial

Development Growth and Equity AMTS Advanced Manufacturing

Technology Centre GDFI Gross Domestic Fixed Investment

BEE Black Economic Empowerment GDP Gross Domestic Product BPO Business Process Outsourcing GNP Gross National Product CAD Computer Aided Design HS

Codes Harmonised System Codes

CAM Computer Aided Modelling ICT Information Communication and Technology

catcon Catalytic Converter IDC Industrial Development Corporation

CDASA Copper Development Association of Southern Africa

IDZ Industrial Development Zone

CNC Computer Numerical Control IPP Import Parity Pricing COTTI The Council of Trade and Industry

Institutions IT Information Technology

CSIR Council for Scientific and Industrial Research

ITAC International Trade Administration Commission

CSP Customised Sector Programme JIA Johannesburg International Airport

DBSP Downstream Beneficiation Support Program

JJAG Jewellery Joint Action Group

DG Director General KAP

Key Action Programme

DIY Do-It-Yourself LMDC Light Metals Development Centre DME Department of Minerals and Energy MERS Micro Economic Reform Strategy DoL Department of Labour MERSETA Manufacturing, Engineering and

Related Services Sector Education and Training Authority

DPE Department of Public Enterprise MIDP Motor Industry Development Programme

DST Department of Science and Technology

mmt Million Metric Tonnes

EHS Environmental Health and Safety MRA Metals Recyclers Association EIDD Enterprise and Industrial

Development Division NAACAM National Association of Automotive

Components and Allied Manufacturers

EMIA Export Marketing and Investment Assistance Scheme

NCTC National Casting Technology Centre

EU European Union NEDLAC National Economic Development and Labour Council

EWS Early Warning System NFMIA Non-Ferrous Metals Industry Association

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Abbreviations and Symbols NPDC National Product Development

Centre SASSEC South Africa Stainless Steel

Export Council NUMSA National Union of Metalworkers of

South Africa SASSFA Southern Africa Stainless Steel

Fabricators Association OEM Original Equipment Manufacturer SATCA South African Tank Container

Association PGMs Platinum Group Metals SAU South African Universities PMDC Precious Metals Development Centre SAWA South African Wire Association QA Quality Assurance SBI Scrap Beneficiation Initiative R&D Research and Development SEIFSA Steel and Engineering

Industries Federation of South Africa

SA South Africa SMME Small Medium Micro Enterprises SABS South African Bureau of Standards SOE State Owned Enterprise SAIF South African Institute of

Foundrymen SSAS Sector Specific Assistance

Scheme SAISC South African Institute of Steel

Construction STEASA Steel Tube Export Association

of South Africa SAISF South African International Steel

Fabricators TASA Tooling Association of South

Africa SAISI South African Iron and Steel

Institute the dti The Department of Trade and

Industry SAIW Southern African Institute of Welders TISA Trade and Investment South

Africa SARS South African Revenue Services WTO World Trade Organisation SASSDA Southern Africa Stainless Steel

Development Association

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Chapter 1 Introduction

1. Towards sector development strategies and programmes, the State President pronounced

during the State of the Nation Address on 11 February 2005 that within the next nine months, the government will make a special effort to finalise sector development strategies and programmes, with regard to: chemicals, BPO and tourism, which will receive additional immediate support; ICT and telecommunications, mining and metals, agro-processing, community and social services; and wood and paper, appliances, the retail and construction industries.

2. In response, using the Customised Sector Programme (CSP) methodology, The

Department of Trade and Industry (the dti) through the Trade and Investment South Africa (TISA) division developed this strategy document for the South African Metals sector with particular reference to the following economic aspirations of the Government:

Improvement of global competitiveness

Enhancement of exports

Attraction of local and foreign investments

Maintenance and creation of new employment

Encouragement of broad based Black Economic Empowerment (equity)

3. The potential of different sub-sectors to contribute toward the economic aspirations

outlined above in Paragraph 2 can be judged by two criteria:

Economic potential - impact successful change in the sub-sector would have on

growth, employment and equity, or some combination of these, if this change can be brought about.

Level of difficulty in successfully changing the institutional issues, necessary to realise the sub-sector potential.

4. The preferred priority sub-sectors are those demonstrating significant size, high potential

and low difficulty of change (risk). This can be summarised in a matrix as depicted in Fig. 1.

Fig. 1. Prioritisation by Economic Potential, Risk & Size of the Sub-sector (2004)

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Source: the dti 5. The metals industries are diverse. The CSP classifies industry groupings according to

types of metals, and according to manufacturing activities. The prioritised industry groupings are:

Steel and stainless steel

Non-ferrous basic metals, especially aluminium

Precious metals

Foundries and forges

Metal fabrication, including structural steel

Jewellery

0.0

5.0

10.0

0.0 5.0 10.0Potential

Cha

nce

of S

ucce

ss

1 Carbon Steel

2 Stainless Steel

4 PGM's

3 Aluminium

5 Jewellery

6 Capital Equipment

7 Foundries

8 Coal

9 Titanium

10 Manganese

11 Copper

12 Granite

13 Zinc

14 Hand Tools & Locks

15 Household Appliances

4

11

2

3

6

1010

11

Area of bubble = Turnover in R b

Low

Medium

High

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6. In both analysis and concrete initiatives, the CSP for the metals industries examines industrial development in terms of:

Firms’ competitiveness in supplying markets: firm capabilities, changing demand

and customer requirements, logistics, price

Beneficiation: adding value to minerals and metals through increased processing, identifying applications and furthering local growth of intermediate through to final products

7. South Africa has developed important strengths in steel, aluminium and precious metals.

The sustained growth of the industries as a whole to achieve broad-based industrial development requires a greatly increased rate of development of the downstream industries using these metals. In turn, this will grow local demand for metals and support long-term expansion.

8. In the finalisation of this strategy document, the dti received input from government

departments and quasi government institutions, and the NEDLAC social partners. This was aimed at gaining consensus on the real challenges facing the sector as well as to jointly develop appropriate action programmes to address the challenges.

9. The Customised Sector Programme supports the thrust of the Micro Economic Reform

Strategy (MERS) by employing a project-based methodology to seek high impact and enduring action initiatives that will materially address Government’s economic aspirations. It is important to note that this document is neither policy nor academic but rather a living document that deals with key strategic challenges that need to be addressed on a regular and continuous basis by all stakeholders in order to realise the stated objectives. Associated with this strategy is a responsibility to guide and oversee the implementation thereof supported by all role players identified. the dti will lead the implementation.

10. This strategy document is structured as follows:

Chapter two:

Describes the metals sector and its value chain;

Makes a case for the importance of beneficiation and value addition;

Uses the existing research and analysis to understand the major trends impacting the metals sectors;

Highlights sub-sectors with potential to make significant contribution to the economic goals or aspirations of Government contained in the dti vision.

Chapter three:

Determines the scope of what the metals sector is trying to achieve - what it wants to look like by 2014;

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Identifies a longer-term direction that maximises the government’s impact in achieving the strategic vision - each theme has an aspirational objective;

Highlights key strategic challenges within a sector that retard that sector’s competitiveness, exports and investments as well as employment, growth and equity. In order to justify the government’s intervention, it must be proven that the key strategic challenges identified will not optimally resolve themselves and that there is a clear role for the government; and

Discusses the key action programmes together with related interventions, which contribute to the strategic vision of the metals sector.

Chapter four:

Details the five-year implementation plan

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Chapter 2 Sector Overview

2.1 Metals Industry Structure

11. In the context of this report, the metals sector covers both the manufacture of basic and

precious metals and the production of metal products. The basic metals sector refers primarily to the iron and steel and non-ferrous sub-sectors. The former sub-sector comprises two kinds of steel: carbon and stainless steel. The non-ferrous sub-sector covers aluminium, brass, copper, lead, tin and zinc. Precious metals include gold and platinum. The metal products industry consists of firms that are involved in the smelting and refining of ferrous, non-ferrous and precious metals, in the rolling, drawing and alloying of metals and in the manufacture of basic castings and fabrication of metal products. Such intermediate products are critical inputs used by downstream metal forgers, engineering companies and jewellery manufacturers.

12. It is important to differentiate and distinguish between “upstream” and “downstream”

industries. Upstream industries are typically large-scale and capital-intensive operations involved in the primary activity of extracting, processing and refining a mineral deposit. As such, activities extend to include mines, concentration plants, smelters and refineries. The extent of beneficiation is limited to the production of an intermediate product, such as an ingot, slag, sheet etc., which requires additional processing, fabrication or modification before it can be included in a finished product. Access to critical inputs, particularly ore and electricity, largely determines the location of such operations. While employment levels are significant at primary production, the skills required to extract and process the ores are generally low to medium in nature.

13. The workshops, foundries, manufacturing plants and enterprises that undertake the

further transformation of basic metal products are referred to as “downstream” industries. Such activities range from the production of simple castings and generic components, to the manufacture of complex pieces of capital equipment and machinery. Employment levels are significantly greater in downstream activities than in primary operations, as is the value of the finished product.

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Fig. 2. Metals value matrix

Source: the dti

2.2 Minerals and Metals Beneficiation in South Africa

14. South Africa has a unique comparative advantage in mineral and metal resources. Not

only does the country have a considerable portion of the world’s known reserves of alumino-silicates, chromium, iron ore, gold, manganese, platinum-group metals, vanadium and vermiculite, but it is also rich in antimony, fluorspar, phosphate rock, titanium and zirconium (see Fig.3 below).

Iron ore

Alumina

Chrome ore

Gold

Platinum

Titanium

Granite

Copper

Diamonds

Manganese ore

SheetsStripsCansFoilsBars TubesRodsWire

Profiles

Shipping

Packaging

Building

Home appliances

Transport

Infrastructure

Engineering

Defense

Tanks / containers

Capital equipment

Design

MIS & ICT

Technology

Moulds & Tools

Marketing

R & D

Training & skills

Government

Machinery

Investor

Jigs

QA & standards

Jewellery

Furniture

METAL CONVERSION(rolling, shaping, extruding,

casting & welding)

Mining

SCRAP / RECYCLING

STAGE 4: (finishing)

STAGES 3: (primary manufacturing)

STAGES 1: (mining) & 2: (refining)

Logistics

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Fig. 3. World ranking production basis

Source: DME 15. Mining continues to be the single most important earner of foreign exchange in the South

African economy. In 2004, mining contributed R87.1 billion (US$13,5 billion) or 7.1% to gross value added. This contribution increased by R2.93 billion from that of the previous year. Sales of primary mineral products accounted for approximately 28.9% of total export revenue in 2004, while gold’s contribution decreased to 9.3% from 11.2% in 2003.

16. South Africa has also been successful in expanding production at the initial stages of

beneficiation. If various processed mineral products, such as ferroalloys, aluminium and carbon and stainless steel, are included in the analysis then the contribution of mineral resources to exports is much higher at over 35 percent. This is not only due to the advantages from the resource base but also utilisation of cheap energy (itself due largely to coal) and large-scale historical state support.

17. Overall, South Africa remains a resource-based exporter of largely unbeneficiated or

partly processed primary materials and a net importer of manufactured goods.

2.2.1 Beneficiation and the Value Chain

18. Value-added processing, or beneficiation, involves the transformation of the raw material

using local factors (labour and capital) to a more finished product that has a higher value than the sale of the raw material.

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19. There are generally four stages involved in mineral beneficiation:

Stage 1 – The primary action of mining and producing an ore or concentrate.

Stage 2 – Converting a concentrate into a bulk tonnage intermediate product (such as a metal or alloy). The production of intermediate products usually takes place in capital-intensive, energy-intensive smelters and refineries. The value added to the original ore increases significantly in this stage, however, the broader economic advantages are constrained by the high level of skills required by employees and low employment levels needed.

Stage 3 – Transforming an intermediate good into a refined, semi-fabricated product suitable for purchase by both small and sophisticated industries. Such activities take place in blast furnaces and foundries using heat-treating and/or cold finishing processes. Employment levels are greater and the degree of value added increases substantially due to the inclusion of other resources and inputs (skills, technology, etc) required in the manufacturing process.

Stage 4 – The converted metal is further transformed into a finished product for sale and subsequent inclusion in a variety of different applications. The range of employment opportunities is significantly greater at this stage and firms include both small- and medium-sized firms as well as large manufacturers.

20. To illustrate how the Metals Sector functions, a simplified example of final demand in the

automotive industry is provided below.

21. The automotive example begins with a ton of iron ore mined in Sishen (Northern Cape)

that is upgraded from 30% iron to 65% iron. It is palletised and sent into a steel mill in Vanderbijlpark (Gauteng). There it is processed into a 300 kg of steel ingot. That steel is then sent to a nearby casting plant where it is transformed into a rough part for a car. The casting is then transferred to another factory where it is machined into a finished part. The finished part is sent to an automotive plant in Rosslyn (Gauteng) where it is installed onto a car to be sold to an auto dealer. A number of years later, the car wears out or is involved in a fatal accident after which it is shipped to a plant to be recycled into scrap. A steel works plant then melts the scrap and produces new steel to be made into new products.

22. Employment opportunities tend to vary from high at the mining (primary) level to low at

the refining (intermediate) stages, to very high at the mass semi-manufacturing and final production stages, as illustrated by the example of iron and steel (Table 1). In addition to increased revenues and employment levels, improving the level of mineral beneficiation in South Africa contributes to GDP, reduces exposure to fluctuating world primary commodity prices, and is part of a sustainable and vibrant economy.

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Table 1. The benefits of beneficiation – value added and employment in carbon steel

(Estimated data) Selling price per ton of steel ($)

Employment per 1000

ton/a steel

Investment Rm per job

Stage

Iron Ore 30 0.12 1 Iron 120 0.6 R2 m 2 Hot rolled Steel 300 1.1 R6 m 3 Cold rolled steel 500 1.6 R8.5 m 3 (Incremental) Pipe and Tube 650 7 R1.5 m 3 Structural Steel 1000 75 R0.1 m 4 White goods 5000 100 R0.4 m 4 Mining Equipment 13000 150 R0.6 m 4

Source: the dti

23. Currently a very small proportion of most metals are beneficiated through to stage 4 where by far the largest employment creation occurs (Table 2). This reflects the overall underdevelopment of the downstream metal products industries, which is the single greatest challenge addressed in the CSP. It is important to emphasise that the reasons for this underdevelopment (and the resultant poor employment outcomes from these industries) include weak linkages and import-parity pricing by upstream metals producers at stages 2 and 3, and other factors impacting on the competitiveness of downstream firms at stage 4 which relate to skills, investment, production capabilities and demand. In addition, it must be remembered that by far the most important metal in terms of volumes remains steel.

Table 2. Stages of beneficiation and levels achieved

Commodity Stage 1 Ores /

Concentrates (%)

Stage 2 Processed / Refined Ore

(%)

Stage 3 Primary

Manufacture (%)

Stage 4 Finished

Manufacture (%)

Gold 100 100 5 2 Diamonds 100 100 6 - PGM 100 100 - 6 Iron ore to steel 100 30 30 15 Chrome to stainless steel 100 85 9 3 Coal 100 65 - 65 Aluminium 0 100 30 11 Zinc 100 100 90 60 Manganese 100 50 25 22 Titanium 100 15 4 Small Copper 100 100 65 50 Scrap - - 50 70

Source: the dti

24. The major products made at stages 3 and 4 are outlined in Table 3. This provides a starting point for identifying opportunities and addressing obstacles, with particular attention to products in stage 4 such as fabrication of metal products and castings. Understanding the factors underpinning the performance at stage 4, and the obstacles

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to developing firm competitiveness has to be the major focus of this CSP if it is to address the historical underdevelopment of downstream and more labour intensive activities.

Table 3. Stages of beneficiation: opportunities

Commodity Stage 3 Primary Manufacture

Stage 4 Finished Manufacture

Gold Bars, chemicals, wire Coins, jewellery, industrial, dental Diamonds Cut & polish Jewellery, cutting tools PGM Bars, chemicals Catcons, jewellery, industrial Iron ore to steel Slabs, billets, flat and long products Metal products, machinery, castings Chrome to stainless steel

Slabs, billets, flat and long products Metal products, machinery, castings

Coal Electricity, chemicals Energy intensive products Aluminium Slabs, sheet, rod, extrusions, ingot Transport, packaging, building,

industrial, castings Zinc Ingot Galvanised products, castings,

batteries Granite - Tiles, measuring tables Manganese EMD, alloys Batteries, chemicals Titanium Pigment, metal Pigment uses, metal products Copper Billet, bars, sheet, extrusions Cable, tubing, copper alloy products Scrap Ingot, Slab Foundry products

Source: the dti

25. The government envisages South Africa as a base for adding value to raw material inputs from anywhere in the world, not only domestic resources. To this end, it is committed to identifying existing sources of competitive advantage in the country and the tools and prerequisite strategies needed to achieve these goals in the shortest period of time, with the least ‘wastage’ of resources, and with the maximum socio-economic impact possible.

26. The success for developing downstream industries requires the attainment of the key success factors as outlined in Table 4. The Key Action Programmes have been designed to achieve these key success factors. Addressing system productivity and competitive inputs leads to a competitive advantage on price basis, which attract manufacturing concerns to these geographic areas. However, to be competitive on product value basis will entail giving attention to product design and R&D.

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Table 4. Key Success Factors

Source: the dti

2.3 Performance of Metals in South Africa: An Overview

27. South Africa’s well-developed metal industries, supported by the endowment of natural resources, represent roughly a third of all manufacturing activity and have been the fastest growing manufacturing sectors over the past decade by a significant margin.

28. Notwithstanding the size, these industries exemplify the non-employment generating and capital-intensive manufacturing trajectory in the past decade. The upstream basic metals industries (basic iron and steel and non-ferrous) are highly capital-intensive and have registered very high rates of growth while shedding labour (Fig. 3 and 4). By comparison, the labour-intensive metal products industry2 has grown very slowly. It has recorded some net employment increases since 2000. The upstream basic metals industries are also characterised by very large economies of scale, and a very small number of producers with price setting power.

2 Note: Metals products and downstream metals industries terms are used interchangeably in the document

Competes on product value

Eff

ect

ive

mark

eti

ng

P

rod

uct

D

esi

gn

R&

D

• Marketing expertise • Create competitive

advantages • Understand market • Price/quality/service

• Use domestic base to develop exports

• Develop brands • BEE

• Design for market • Own design

capability • Tooling design &

manufacture

Competes on price basis

Syst

em

p

rod

uct

ivit

y

Co

mp

eti

tive

inp

uts

• Management skills

• Labour productivity

• World scale and class

• Multi shifting • Cluster

formation • Infant industry

support

• Input materials • Labour costs • Logistic costs • Financial costs • Infant industry

support

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2.3.1 Employment and Performance

Fig.4. Value added, basic prices (constant)

Source: (Identify)

29. Basic iron and steel was the largest sector in terms of output and value-added in 2004. Value-added of basic iron and steeliron and steel has grown strongly in the last 5 years, while the performance of non-ferrous metals and metal products has been relatively poor, following strong growth in non-ferrous metals in 1994 to 1996 (Fig.4). In particular, the relatively poor performance of the labour-intensive metal products industry reflects the ongoing under-development of downstream industries.

Fig. 5. Employment

0

2 0 0 0

4 0 0 0

6 0 0 0

8 0 0 0

1 0 0 0 0

1 2 0 0 0

1 4 0 0 0

1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4

Ran

d m

n, c

onst

ant 2

000

pric

es

B a s ic iro n a n d s te e lB a s ic n o n -fe rro u s m e ta lsM e ta l p ro d u c ts

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

No.

of p

eopl

e em

ploy

ed

Metal products Basic non-ferrous m etals

Basic iron and steel

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2.3.2 Capital Investment Trends

30. The development patterns reflect the major investments in basic iron and steeliron and

steel and non-ferrous metals in the mid 1990s, and the failure of these to link to increased investment in downstream industries (Fig. 6). In 1996 to 1998 investment in basic iron and steel averaged around 50 percent of the sector’s value-added. Investments in non-ferrous metals occurred slightly earlier, but were proportionately even greater with Gross Domestic Fixed Investment (GDFI) to value-added ratios in 1993-1995 were in excess of 75 percent. By comparison, investment in the metal products sector has remained low throughout, never rising above 18 percent of value-added and averaging 14 percent over the decade. The investments in basic iron and steel and non-ferrous metals were supported by state finance through the IDC and state investment in infrastructure. But, in each case the major investments coincided with large reductions in employment. The real benefit from the investments in basic metals depends on whether there are gains to local industry that uses this metal in their own products.

Fig.6. Investment – (GDFI)

Source: Quantec

2.3.3 Trade Performance

31. The major investments in basic iron and steel and non-ferrous metals and the high rates

of growth of output have meant an improving trade surplus. In 2004, 45 percent of

0

1000

2000

3000

4000

5000

6000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Rm

- 20

00 c

onst

ant p

rices


Basic non-ferrous metals

Metal products excluding machinery

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basic iron and steel and 26 percent of non-ferrous metals were exported (Table 5)3. The high level of exports of basic metals is partly a result of poor growth of downstream beneficiating industries. The trade balance in metal products amounted to -$176 million in 2004 and has been worsening since 2001. The industry has also been faced with significant increases in import penetration, while the opposite has been the case in basic metals.

Table 5. Trade Performance Summary data


Non-ferrous metals

Metal Products

Avge annual VA growth, %, 1994-2004 5.8 5.7 1.3 Avge annual employment growth, %, 1994-2004 -5.0 -4.2 -0.8 Employment, 2003 40 428 11 960 109 667 % Semi & unskilled labour, 2002 55 55 64 Capital: Labour ratio (Rth per employee, 2003) 830 2004 74 Export: Output ratio 2004, % 45 26 13 Imports: Consumption ratio, 1994, % 19 27 9 Imports: Consumption ratio, 2004, % 9 22 13 Net export ratio, 2004, (X-M)/(X+M) 0.80 0.86 -0.11

Source: Quantec

32. Despite government’s strategy of moving towards increasing beneficiation and growth of

downstream industries, the reverse has therefore been occurring, with South Africa being increasingly a producer of relatively unbeneficiated upstream products.

2.4 Main Stakeholders

33. Government departments

Department of Trade and Industry – to provide a conducive and enabling environment for industrial development

Department of Science and Technology – to resolve the technology chasm in key industries of the economy

Department of Minerals and Energy – encourage greater beneficiation

Department of Labour – to resolve the challenge of scarce and ageing skills necessary for the growth of downstream metal industries.

Department of Public Enterprises – ensure the planned capital expenditure on infrastructure generates greater economic spin-offs to the rest of the economy.

34. Public institutions

Mintek – R&D

CSIR - R&D

3 Note that non-ferrous metals include castings (of ferrous and non-ferrous metals). Much higher proportions of aluminium were exported than the average figure reported here.

22



Industrial Development Corporation (IDC) – future funding programmes are aligned to key sectors with potential to unlock constraints to economic development

Merseta – skills development and training

35. Industry representation

Steel and Engineering Industries Federation of South Africa (SEIFSA)

South African Iron & Steel Institute (SAISI)

Aluminium Federation of South Africa (AFSA)

Aluminium Casters Association (ACA)

South African Institute of Foundrymen (SAIF)

National Association of Automotive Components and Allied Manufacturers (NAACAM)

Non-Ferrous Metals Industry Association

Metal Recyclers Association (MRA)

Copper Development Association of Southern Africa

South African Institute of Steel Construction (SAISC)

Southern African Institute of Welders (SAIW)

South African Wire Association (SAWA)

Steel Tube Export Association of South Africa (STEASA)

South African International Steel Fabricators (SAISF)

Southern Africa Stainless Steel Development Association (SASSDA)

South African Stainless Steel Fabricators Association (SASSFA)

South Africa Stainless Steel Export Council (SASSEC)

South African Tank Container Association (SATCA)

36. Trade Unions

National Union of Metalworkers of South Africa (NUMSA)

Solidarity

2.5 Sub-Sector Analysis

37. This section assesses the performance of the main industry groupings: carbon steel;

stainless steel; aluminium; foundries; metal fabrication; and jewellery. To grow the downstream activities it is important to understand the environment in which firms operate. This involves unpacking factors that drive the competitiveness of the metals

23



sector in its entirety with the aim of contributing to government’s economic aspiration. This section therefore covers:

The global structure and recent developments in the industries

The performance of the South African metals industries (drawing primarily on existing research)

2.5.1 Carbon Steel

38. Carbon steel is a metal, a combination of iron, carbon in small quantities and other

elements used to enhance its properties. With a low carbon content it has the same properties as iron, soft but easily formed. As carbon content rises the metal becomes harder and stronger but less ductile.

39. Carbon steel is the most widely used engineering material. Despite its relatively limited

corrosion resistance, carbon steel is used in large tonnages in marine applications, nuclear power and fossil fuel power plants, transportation, chemical processing, petroleum production and refining, pipelines, mining, construction, processing equipment, motor vehicles and household durables.

40. There are two main forms in which carbon steel is produced, flat and long steel products,

which require different production plants:

Flat-rolled products - slabs, hot-rolled coil, hot-rolled plate, cold-rolled coil, hot dipped galvanised coil, and electro-zinc coated coil

Long products – wire rod, medium sections, reinforcing bar, and merchant bar

The global carbon steel industry

41. The steel industry continues to become increasingly global but remains relatively

unconcentrated at this level. The ten largest steel companies accounted for only about 26 percent of world steel output in 2004.

42. The global trade in steel grew by 86 percent from 1985 to 2003, amounting in 2003 to

314 million metric tonnes, with the largest proportionate growth being in coated sheet. International trade in ferrous scrap has also increased, and reached 93 million tonnes in 2004.

43. In 2004 the global carbon steel consumption was about 950 million tonnes4. China is the

world's largest steel market, accounting for nearly 25 percent of total world steel consumption. Its economic development has led to a dramatic acceleration in the consumption of steel. Chinese GNP is growing by 8 to 10 percent per annum and steel consumption is growing by 10 to 15 percent per annum. China previously had hundreds of small steel plants operating at very low scales of operation and efficiency,

4 According to the International Iron and Steel Institute (IISI)

24



which could not keep up with expanding demand. In recent years, however, China has made massive investments in large-scale steel plants and will become increasingly less reliant on imports. China remains a major importer of higher quality steel products.

44. Elsewhere, the United States of America continues to be a significant net importer of

steel. The European Union has moved from being a major steel exporter in the beginning of the 1990s to a position of near balance in steel trade in volume terms. The EU still remains a net exporter in terms of value.

45. Recent developments in the global carbon steel industry:

Very slow growth in mature economies and significant growth in developing countries (e.g. China)

Greater consolidation of activities – formation of Mittal steel company

The global economy witnessed a gradual recovery from late 2003 onwards. While the economies of USA, Japan and Europe continue on course towards economic recovery, the growth in China has become one of the major factors currently driving the world economy.

The South African carbon steel industry

46. Mittal SA (formerly Iscor) dominates the primary steel industry, with only Highveld Steel

competing with it in the flat steel products market (Mittal SA produces 84 percent of all flat steel in South Africa). Highveld, Scaw Metals, Cape Gate and Cisco compete with Iscor in the long products (profile products) markets. Although market shares differ according to the different types of long products, overall Mittal SA has the largest market share with around 50 percent. Ranked the world's 19th largest steel producing country in 2002, South Africa is the largest steel producer in Africa (with almost 60 percent of Africa's total production).

47. South Africa produces 3.6 million tonnes of flat steel and 2.7 million tonnes of long steel

each year, of which around 44 percent is exported5. The SA producers are, however, vulnerable to the cyclical nature of the industry, in terms of domestic and international demand as well as price fluctuations. This trend is perpetuated by the fact that approximately 40 percent of the country’s products are traded in an unbeneficiated form on international markets.

48. In the past 20 years, it is striking just how little the domestic use of carbon steel has

changed (Fig. 7), a consequence attributed to import parity pricing. Over the same period, there has been major restructuring within the industry, with older and less efficient plants being closed, upgrading of remaining mills and new investments, notably in Saldanha Steel. Employment in the industry is currently around one-quarter of the levels in 1980.

5 According to SA Iron & Steel Institute (SAISI)

25



Fig. 7. Sales of Carbon Steel

Source : South African Iron and steel Institute (SAISI), 2005

49. In 2004, the biggest industrial consumer of carbon steel was building & construction (22 percent), followed by unallocated (19 percent), cables; wire products & gates (14 percent) and tube & pipe (12 percent). Within manufacturing groupings, structural metal is the single biggest consumer of carbon steel (however, much of the large unallocated quantity is also utilised by manufacturing firms).

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Value Added Exports Domestic Comsumption less Imports Imports used domestically Exports

26



Table 6. Sales of primary carbon steel to industrial groups, 2000- 2004 (metric tons)

Industrial Groupings

2000 2001 2002 2003 2004

Mining 113 380 111 911 124 995 110 500 145 813 Manufacturing 2 189 077 2 273 100 2 684 753 2 207 350 2 519 654 Packaging 285 210 302 860 313 015 281 874 260 666 Structural Metal 904 366 879 894 1 069 074 781 231 982 283 Tubes & Pipe 410 068 420 387 522 588 396 253 527 610 Plate & sheet metal works 437 605 402 683 475 010 355 571 432 319 Roofing & cold forming 56 693 56 824 71 476 29 407 22 354 Agricultural 26 583 25 354 29 415 41 509 38 558 Automotive 247 704 237 074 308 045 236 078 311 816 Electrical apparatus/white goods

51 662 51 358 56 218 54 277 49 177

Cables, wire products & gates

467 670 542 511 672 177 617 247 647 086

Fasteners 42 106 49 141 52 089 49 333 57 113 Other 163 776 184 908 184 720 145 801 172 955 Building & construction 751 046 885 206 1 033 880 864 935 966 034 Unallocated 559 792 559 747 676 817 564 701 861 605 Total 3 613 295 3 829 964 4 520 445 3 747 486 4 493 106

Source: SAISI, 2005

2.5.2 Stainless Steel

50. Stainless Steel is a generic term given to a group of corrosion resistant metals containing

at least 10.5 per cent chromium and varying amounts of nickel, molybdenum, titanium, niobium, nitrogen and other elements. There are four major types of stainless steel: martensitic; ferritic; austenitic; and duplex stainless steel.

51. Martensitic stainless steel is a plain chromium stainless steel with a relatively high carbon

content. It has moderate corrosion resistance and poor weldability. Ferritic stainless steel, on the other hand, has a relatively low carbon content with good corrosion resistance and fair weldability. Austenitic stainless steel is a chromium and nickel stainless steel with low to very low carbon contents. It has excellent corrosion and high temperature oxidation resistance with excellent weldability and formability. Duplex stainless steel is also a chromium and nickel stainless steel with a low carbon content with excellent corrosion resistance, particularly with regards to pitting, crevice corrosion and stress corrosion cracking and good weldability and formability. With the exception of austenitic stainless steel all the types are magnetic.

52. Stainless steel primary products can be broadly classified into flat and long products6, and

ingots. The main South African producer does not produce long products. As with other metals, stainless steel is manufactured from various primary inputs, and then undergoes value addition through successive stages of intermediate products before being embodied in final products purchased by consumers.

6 Flat products refer to coils, strips, sheets and plates. Long products refer to bars; rods; and wire and sometime also include ingots.

27



The global stainless steel industry

53. The world stainless steel industry capacity was approximately 21.3 million metric tonnes

(“mmt”) in 2003 while demand was estimated to be around 19.8mmt. The global industry is highly consolidated, with the top 10 producers (TK Steel; Arcelor; Acerinox Group; Avestra Polarit; Posco; Yusco, NSC, etc) accounting for some 60 percent of world output. In terms of market structure:

China is the dominant market for hot rolled coil, followed by South Korea, Western Europe and Taiwan.

South Korea and Taiwan are major re-rollers, converting hot rolled into cold rolled coil for supply into Asian markets.

Western Europe is the largest market for cold rolled coil, closely followed by the rapidly developing Chinese market.

Europe is the largest market for long products, followed by China and Japan.

54. From a net trade perspective, however, Europe is a large net exporter, along with Japan,

while China and South Korea are net importers, as is the USA. This suggests that, as a net exporter, South Africa could potentially be in an advantageous position relative to Asian competitors. From a functional perspective the biggest consumer was the consumer hardware industry consuming approximately 18 per cent of all stainless steels, followed by process industries at 17 percent (Fig. 8).

28



Fig.8. Global stainless steel consumption, 2003

Source: Southern Africa Stainless Steel Development Association (SASSDA)

Recent developments in the global stainless steel industry:

Most established manufacturers using stainless steel in Western Europe have shifted production into Asia and Eastern Europe to take advantage of low costs of labour and production and the government incentives offered by these countries.

During the last decade China has received the largest investment in stainless steel manufacturing of any country in the world, linked to their extremely high growth in consumption (of 23.8 percent in 2003/04).

There has been consolidation to maintain competitiveness: firstly, consolidating existing production facilities into larger and more integrated plants and, secondly, the major firms expanding production capacity to meet rising worldwide demand.

Increased focus on the high value added segment of the market.

The South African stainless steel industry

Other16%

Building & Construction

9%

Other transport4%

Automotive11%

Industrial catering12%

Consumer hardware

18%

Process industries17%

Chemicals & pharmaceuticals

13%

29



55. In South Africa, approximately 64 percent of output is in the form austenitic stainless steel while the remaining 36 per cent is in the form of ferritic stainless steel7. This mix differs from the international average in that approximately 70 percent of the world’s output is in the form of austenitic, 20 per cent in the form of ferritic and the remainder in the other forms. The South African mix is due to the fact that automotive emissions components industry is a very important market segment in the country.

56. Columbus Stainless8 is the dominant producer of stainless steel, with a production volume

of some 647,000 tons in 2003, worth approximately R12 billion. Iscor have been producing 3CR12 utility stainless steel long products under license from Columbus Stainless since 2002, but the volumes are extremely low at about 3000 tons per annum. South Africa is a major net exporter of stainless steel, with exports increasing in recent years due to both increasing production and weak domestic demand (mainly due to poor export performance of beneficiated products). More than 80 percent of Columbus’ product is exported to the European markets, (in which due to the EU – South Africa free trade agreement there are now zero duties), USA market and various markets in East Asia.

57. The domestic market consumption of stainless steel has more than doubled during the

past decade (from a very low base). In 2004 consumption exceeded 150 000 tons of which 90 percent was produced in South Africa. The biggest consumer of stainless steel is the distributor, followed by automotive sector and tube & pipe (Table 7). The data depicts a sharp decline in the demand for stainless steel in the tank containers industry (discussed in detail below). The automotive sector, whose demand increased by 13 percent in the last year, is much larger in South Africa than internationally, while tubes & pipes are of a similar scale. The South African industries in electronics, metal goods, engineering and construction appear under-developed suggesting that there is a range of opportunities to be pursued in fabrication of stainless steel.

Table 7. South African stainless steel demand, 2003 and 2004

Sector

2003 2004 Growth rate

Automotive 38 900 44 080 13.3 Tank Containers 14 400 6 626 -54.0 Tubes & Pipe 15 800 9 707 -38.6 Domestic Ware 4 100 3 311 -19.3 Distributors 43 400 45 204 4.2 Foundries/Long Products 3 700 4 019 8.6 Total 120 300 112 947 -6.1

58. Investments amounting to R1.9 billion have been attracted into the industry in the past 5 years, of which R1 billion went to the new cold rolling mill at Columbus Stainless and R900 million to downstream industries within the markets identified above.

7 HSRC and Blueprint Strategy & Policy (2003), “Promotion of Secondary Industrial development & Clustering in Mpumalanga Stainless Steel & Chemical Clusters.” 8 Columbus Stainless is now part of the third largest global producer, the Spanish Acerinox Group

30



2.5.3 Aluminium

59. Aluminium is a strong, light and durable metal that is resistant to corrosion, a good

conductor of electricity and heat, and a good reflector. It is also non-magnetic, non-toxic and can either be cast or rolled directly. Except for use in a number of electrical applications, aluminium is seldom used in its pure form. It is usually alloyed with small quantities of other metals (copper, zinc, magnesium) to give it its particular properties. Due to its favourable properties and the environmental and cost-saving benefits associated with recycling, the consumption and application of aluminium in various sectors has increased significantly over the past decade. Indeed, global production of primary aluminium has increased from 3 million tons per annum in 1960 to over 25 million tons currently, second only to steel. Production is forecast to increase by a further 35 percent over the next decade.

60. The main uses of aluminium are in the building and construction sectors, containers and

packaging, electrical applications, road, air and seagoing transport, and industrial machinery and equipment. The gradual shift towards the use of aluminium alloys for car bodies and engines epitomises strong future growth in this sector.

Structure of the global aluminium industry

61. The aluminium industry is comprised of firms engaged in the extraction of raw bauxite,

refining of raw bauxite into alumina, production of primary aluminium from alumina and recycled aluminium, and the manufacture of semi-fabricated aluminium products. Beyond the semi-fabrication stage, aluminium is used to manufacture a wide range of products that are used extensively throughout the world.

62. The global aluminium industry is dominated by five big companies, comprising three

American (Alcoa, Kaiser and Reynolds), one Canadian (Alcan) and one European firm (Alusuisse). The main contributors to global output by country were China (which produced 4.4 mn tonnes), Russia (3.3 mn tonnes), and the USA and Canada (which each produced 2.7 mn tonnes). In 2004 South Africa was the tenth largest primary aluminium producer, with an output of approximately 850 thousand tonnes.

63. The world consumption of aluminium has significantly increased due to the widespread

usage of the metal in industrial applications (Fig. 9). The United States is both the world’s largest producer (17 percent of global requirements) and consumer of aluminium (20.1 kilograms per capita), but the Asian market is the fastest growing. While aluminium consumption is low in developing countries (India and China have per capita levels of around 0.5 and 2.0 kilograms respectively), it is projected that demand will increase as industrialisation continues and sectors such as electronics and motor vehicles become increasingly important.

31



Fig.9. Global Consumption of Aluminium

Source: (Identify) 64. Recent developments in the global aluminium industry:

Increased smelter capacity - by Russia top aluminium producer, RUSAL; Alcoa

Inc; and Companhia Vale do Rio Doce and Aluminium Corp of China Ltd.)

Decline in China’s production activities due to pressure from severe shortage of power, increased power fees and the withdrawal of power subsidies and shortage of raw materials.

Increased capacity to produce primary aluminium products

The world's top two aluminium producers, Alcan Inc and Alcoa Inc had signed a memorandum of understanding to assess the feasibility of a 1.5 million-tonne a year alumina factory in Guinea, which could be up and running by early 2008.

An Alcoa-led joint venture was studying a $1.1 billion expansion of alumina output at its Australian Wagerup refinery, joining rival BHP Billiton Ltd Plc in upping production to keep pace with demand in China.

Alcoa Inc hopes to more than double production of alumina at sites in Brazil and Jamaica in projects costing about $1.35 billion. Alcoa, responding to growing consumption of aluminium, seeks to raise production capacity at the two refineries by a total of about 3.4 million tonnes a year.

The South African aluminium industry

65. South Africa has no economically exploitable deposits of bauxite and no alumina

production facilities. Thus, all alumina feedstock used in primary aluminium production is imported, predominantly from Australia. The domestic primary aluminium industry exists only because it has access to cheap electricity.

32



66. Production of primary aluminium in South Africa is controlled entirely by BHP Billiton, the

world’s largest diversified resources company. BHP Billiton has majority ownership of the two aluminium smelters in South Africa, Hillside Aluminium and Bayside Aluminium, both of which are situated in Richards Bay on the country’s east coast. It also operates the Mozal aluminium smelter in Mozambique.

67. While Bayside serves the domestic market, Hillside is predominantly export-oriented in

nature. In October 2003, a brownfield expansion of the smelter was completed, increasing Hillside’s production capacity to 670 000 tonnes of melting ingots annually and improving the capacity to produce t-bars and rim alloy of international specification.

68. South Africa’s primary aluminium has increased significantly over the last three decades,

rising from 22 000 tons in 1971, to approximately 850 000 tons in 2004. Of this, only 270 000 tonnes, or 32 percent of total output, is sold to domestic downstream firms, the remainder is exported, largely to Asia.

69. Of the aluminium sold to the domestic industry, it is estimated that approximately 60

percent is exported after only limited value addition (mainly rolling to sheet by Hulett Aluminium), and a further 10 percent is exported after further downstream value-addition.

70. Imports of aluminium into South Africa are negligible, at approximately 3 000 tonnes per

year. The imported primary aluminium products are products of certain specifications not produced by either Bayside or Hillside, and their importation is generally facilitated by BHP Billiton on behalf of downstream customers.

71. In terms of future possibilities of primary aluminium expansion in the country, Alcan, a

large Canadian aluminium producer, along with the IDC of South Africa, is in the process of investigating the feasibility of building a new smelter at the Coega Industrial Development Zone in the Eastern Cape. It is envisaged that construction of the smelter will begin in late 2005, with the first aluminium ingots being produced in 2008. The expected capacity of the plant is 660 000 tonnes per annum.

Secondary aluminium production

72. An analysis of the upstream production of aluminium must also include aluminium produced through recycling. The increasing demand for aluminium from the motor industry in the 1990s saw the global secondary aluminium industry grow rapidly (as it continues to do), with recycled aluminium satisfying approximately 40 percent of global aluminium demand by the end of the last decade. While the rising demand for aluminium, combined with an international shortage of scrap, has seen the international price of scrap aluminium surge upwards, recycling scrap aluminium into ingots continues to be cost-effective, as it takes 95 percent less energy than is used in producing primary aluminium from bauxite. Moreover, the quality of the aluminium produced is not compromised through the recycling process. Therefore, many countries

33



without primary aluminium capacity have enjoyed the opportunity of developing large and successful recycling industries (through import-substituting protectionist policies) to supply their downstream fabrication sectors.

73. South Africa’s secondary aluminium industry, however, remains relatively small,

producing only 30 000 tonnes of recycled aluminium ingot each year. The domestic industry has failed to grow due to the climbing price of domestic scrap (the price of South African scrap aluminium rocketed 60 percent in 2003), as countries with scrap shortages are willing to pay high prices for domestic scrap. Indeed, of the 60 000 tonnes of aluminium scrap generated in South Africa every year, approximately 50 percent is exported by domestic scrap dealers (predominantly to countries in Asia).

74. The domestic industry argues that buyers in other countries are able to offer a premium

above the price that domestic secondary aluminium processors are capable of offering because of the protection offered to secondary aluminium producers in these countries. For example, India, which purchases a large proportion of South Africa’s scrap, has a 19 percent import tariff on aluminium ingots, but substantially smaller tariffs on scrap imports. This situation allows the secondary aluminium processors in that country to offer an additional margin on scrap, as they can get a higher price for the recycled ingot in their domestic market. South Africa, by contrast, has no tariff on imported ingots, meaning that domestic secondary aluminium producers are unable to offer any premium to domestic scrap dealers, resulting in scrap being exported. Most countries also prohibit the export of scrap (or levy large export duties), which has created large-scale industries recycling scrap aluminium.

75. Regulations implemented by the South African government to slow the export of

domestic scrap, thereby providing a greater and cheaper supply to the domestic market, have had little impact on the industry, which continues to be out-competed by ‘protected’ foreign buyers.

76. Major producers of secondary aluminium in South Africa include Zimalco, Future Alloys,

Metlite Alloys and Aluminium Granulated Products. Zimalco is the largest secondary producer, producing 50 percent of secondary aluminium. Survival in the domestic secondary aluminium industry remains a challenge. Therefore, while the sector remains handicapped against other countries that employ protection, the South African secondary aluminium industry will be unable to supply the volumes of ingots and prices that will place a competitive constraint on the pricing practices of primary aluminium producers within the South African market.

Semi-fabricated and final product manufacturing

77. South Africa's semi-fabrication capacity totals 275 000 tpa, while the local market for

rolled products and extrusions is only some 65 000 tpa. Hulett Aluminium and Hulett Hydro Extrusions are the key semi-fabricated and extrusions sectors in the South African economy. Hulett Aluminium is South Africa’s largest semi-fabricator, purchasing over 50 percent of all domestic aluminium, which it then rolls into sheets, plates and foils of various thickness. Of the 175 000 tonnes of rolled products that

34



Hulett produces each year, approximately 70 percent is exported directly, with a further 10 percent exported after further value addition. Hulett is owned by the Tongaat-Hulett group (40 percent), the IDC (30 percent) and Anglo-American (20 percent). At the end of the last year, Hulett Aluminium completed a R2.4-billion expansion of its Maritzburg rolling plant, effectively resulting in an increase in production output from 50 000 t/y to more than 185 000 t/y by the end of 2003. At the time of the announcement of the expansion in 1996, the company's turnover was just under R1-billion, it had grown to R2-billion in 2000, and is expected to grow to over R5-billion by 2004.

78. The other 500-plus manufacturers in the downstream market supply a diverse variety of

finished products to both the domestic and international markets. In terms of market segmentation, the transport industry is the biggest consumer of aluminium (30 percent) and has been the fastest growing industry, at the rate of 6.6 percent, within the aluminium conversion industries. This is followed by packaging & consumer goods (24 percent) and construction & building industry (19 percent) (Fig. 10).

Fig. 10. Market segmentation (2004)

Source: (Identify) 79. Currently, the main aluminium users in South Africa are the automotive and packaging

sectors, followed by light engineering and electrical cable, as well as heavy transport sectors. The automotive sector has become the largest single aluminium market. In the past ten or so years, the automotive sector’s demand for aluminium, mainly in the form of castings, has increased internationally more than threefold to an average of more than 120kg/car. The automotive market holds a lot of promise for the South African aluminium industry and could be better served with right-priced casting components cast from beneficiated scrap, as long as unbeneficiated scrap, currently exported, is retained for local beneficiation.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Construction andBuilding

Transpor tIndustry

Electrical Industry Packaging andConsumer Goods

Machinery andEquipment

Other

35



80. Challenges for aluminium downstream industries

The worldwide shortage of scrap in the aluminium sector, resulting from the

surge in demand by the automotive industry during the 1990s.

The cost of inputs has had a negative impact on the global competitiveness of South African industries.

A major concern has been the strength of the Rand, especially for those companies that are tied to price-controlled contracts.

The local industry needs more foreign investment in technology and technology transfer, as well as in modern methods of training

Lack of growth in the foundry industry.

2.5.4 Foundries

81. The South African foundry industry has undergone a significant amount of restructuring

and consolidation over the past 10 to 15 years. While growth opportunities and niche markets exist to be exploited, global improvements in casting technology and the quality of castings, and the ability of transnational corporations to source castings from anywhere in the world have all heightened competitive pressures in the domestic foundry industry. The number of firms shrank from 450 in the early to mid 1980s to just over 200 in 2003. However, in the last three years new entrants have increased overall numbers once again, and there is an important group of foundries recording healthy growth in recent years.

82. Geographically, more than half of all the foundries in South Africa are located in Gauteng.

In turn, more than 65 per cent of all foundries operating in Gauteng are situated in Ekurhuleni, deriving locational externalities from a concentration of firms in the metals and machinery, mining, and engineering sectors. The Western Cape, Eastern Cape and KwaZulu-Natal all have significant foundry industries but are small in number relative to Gauteng. In terms of market share, the foundry industry is dominated by a small number of large groups and individual companies: Murray & Roberts, Ozz Industries, Scaw Metals, Tiger Wheels, Guestro Castings, Auto Industrial, Hayes Lemmerz SA (previously known as NF Die-casting), and Atlantis. These companies together account for more than 60 percent of tonnes cast per annum.

83. The foundry industry provides critical inputs to most of manufacturing sectors, with

mining (including pumps; valves; and pipes), automotive, and general engineering being the largest industries it supplies. It is estimated that 40 to 50 percent of South Africa’s casting production (in value) is for automotive components. Approximately 85 percent of all aluminium castings produced in South Africa are used in the automotive industry, which also consumes 55 percent of cast- and ductile-iron castings. However, the industry is very small relative to its global competing counterparts. China has 12 000 production units, the largest foundry industry in the world, followed by India with 4 500 foundries in 2003. The world castings production in 2003 amounted to 73 million metric tons of which SA contributed only 0.64 percent. The global market is dominated by China, USA, Japan, Germany and India (Table 8).

36



Table 8. Comparison of South Africa with Top 10 casting-producing nations, 2003

Country Production (Metric ton)

No. of foundries

China 18 145 966 12 000US 12 069 170 2 620Japan 6 111 405 1 713Germany 4 722 583 651India 4 038 000 4 500France 2 484 527 529Italy 2 441 000 1 139Brazil 2 249 413 1 000Mexico 1 822 980 1 787Korea 1 783 800 769South Africa 500 000 213

Source: Modern Casting, Dec 2004, DTI (2003) “Foundry Survey”

84. There were no major investments in capital equipment or new foundries in South Africa

until the late 1990s. This changed in 2000 when a R35 million plant was commissioned by Eclipse Foundry (part of the Ozz Industries Group, controlled by Kagiso). Subsequent investments in new technology and equipment have also taken place at a number of foundries thereafter. Two major new foundries opened in 2002, both of them in the Port Elizabeth area – Murray and Roberts invested R130 in an aluminium cylinder head foundry and Bel-Essex Corporation (Belmec) injected R109 million into an aluminium high-pressure die-casting facility involving a major Italian investment. The Belmec foundry has subsequently undertaken a R65 million expansion.

85. Despite some notable investments in upgrading, the state of the plant and equipment

being used by the majority of South African foundries remains a major concern. The local foundries will have to invest more in new equipment, especially if they want to compete against the threat of general engineering castings that are now being imported from countries like China and India.

Technological capabilities in the South African foundry industry

86. Broadly, competitive pressures have led to the emergence of a two-tiered structure in the

domestic foundry industry, in which firms are characterised by very different technological capabilities. The first tier comprises firms that have responded to competitive pressures by improving their technological capabilities and innovative capacity. These firms have focused on their core business activities by outsourcing non-core functions, have modernised their equipment, and have acquired and absorbed new technology. The process of modernisation has taken place in the context of a legacy of outdated and increasingly unsuitable casting equipment and machinery, and has accelerated the trend – notwithstanding domestic market limitations – towards higher-volume production. These firms are growing, both output and employment. The

37



second tier of firms is failing to meet the challenge, and is responding with narrow cost minimisation strategies. Many firms have also gone out of business in the past decade.

87. The technological capabilities of firms in the first tier do not appear to be a function of the

casting process or of the market to which firms supply. Technologically dynamic firms are across the range of casting processes and the vast majority of firms still supply a range of diverse markets, notwithstanding the broad trend towards increased specialisation. All foundries supplying the automotive market, however, have clearly benefited from positive externalities generated by the MIDP and are developing their capabilities on the back of the programme’s success. On the whole, the type of process and the market supplied impact upon firms’ capabilities only at the margin. Much more than particular casting process, the dynamism of firms in the industry appears to be related to firm strategy and orientation.

88. Production capabilities in general – and technological capabilities in particular – are not

being harnessed effectively. R&D in new products and materials technologies is hampered by the industry’s focus on externalising sources of funding for local development, i.e. foreign direct investment. This is particularly so for the auto industry where all parts are designed overseas (and little local design is sought). This means specification of processes and materials is also done overseas. South Africa is primarily seen as a productive capacity location and not an R&D location. Moreover, process development is more hampered by a lack of local demand for this requirement. This largely results from a lack of engineering and management skills and resulting commitment to continuous process improvement.

89. On the opposite side of the scale is the mining industry where local development of

equipment for mining and beneficiation has been extensive and the past saw numerous developments in locally developed technology. However, this has declined somewhat with the maturation and decline of the industry.

90. Although developments in process technology are not a function of tooling capacity, it (tooling capacity) affects the industry’s ability to deliver a quality product, on time and within a given commercial value. The industry is thus grappling with process inefficiencies such as high scrap rates and limited re-use capabilities. With respect to environmental technology, the South African foundry industry still regards environmental, health and safety standards (EHS) to be of little importance. It is estimated that only 10 percent of all foundries adhere to a formal EHS standard9. The implementation and enforcement of EHS standards is expected to be a significant cost factor for foundries in the medium term. This certainly needs to be addressed for the industry to be internationally competitive.

91. Opportunities for the foundry industry

The most significant growth opportunity for the foundry industry lies in the

production of aluminium cast components for the automotive industry. It is envisaged that significant growth in both ferrous and non-ferrous foundries can

9 CSIR (2004), Foundry Technology Roadmap

38



be achieved with the commitment of the established OEM's to increase local content of locally assembled vehicles. Even more benefits could be gained if SA had a locally based OEM (such as Hyundai or Daewoo in Korea, Toyota or Honda in Japan, Tata in India).

Any growth in the general transport sector (railways, trucking, busses, mini-busses), using locally sourced products, will have a large affect on the local foundry industry. For example: each rail truck/coach uses a minimum of 30 ferrous castings (excluding top structure and finishes) totalling approximately 12 metric ton per truck/coach.

Government planned capital investment in infrastructure (railways, mass transport, energy generation and distribution) will have significant positive effects on the foundry industry, opening new opportunities for entrepreneurs interested in the foundry industry, if required components are purchased from SA businesses.

Growth in the local aircraft industry will develop much needed precision engineering quality skills that would have a filter down effect on other industrial sectors. Major growth in tonnage would not be expected. However, significant growth in ZAR turnover could be achieved with relatively low output due to the high value nature of the business.

The expected expansion projects from the mining industry and infrastructural development in roads and housing will have positive trickle down effects on the foundry industry through growth in demand from local capital equipment manufacturers, if local equipment is utilised for this purpose.

92. Impediments to growth and challenges faced by the industry

The ability of transnational corporations to source castings from anywhere in the

world means that continued improvements in technological capabilities are crucial alongside cost-competitiveness. Although there are foundries that have introduced technologically improved castings, with both incremental improvements and radical developments in production processes and products, the key challenge is to grow and sustain these operations and also to upgrade production capabilities of those who have not invested in new technologies.

Scrap-metal price and availability

Although South Africa has an abundance of raw materials and the primary and secondary metals industry is well established, the pricing structure of the upstream is not benefiting the local industry.

Most of the minerals are exported in its primary form, reducing the availability of the materials to the local industry. Concerns have been raised about the sharp increases in local scrap pricing and reduced availability of quality material due to an increase in exports. While this is a global phenomenon, the effect of protectionist policies implemented by various countries on the local pricing of scrap needs to be fully understood and a suitable response, that will contribute to the development of local beneficiation, be implemented.

Low capital investment rates

Skills shortage at all levels of the production chain – from product design; product optimisation; process optimisation; and process control and quality.

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The industry is suffering from both a gradual loss of skills and the low levels of formal training, particularly in basic foundry skills, tooling, and rapid design technologies.

The industry is experiencing difficulties in attracting highly skilled entrants.

The skills constraint is particularly severe for smaller firms, which lack the resources to provide on-going training in new techniques and production methods.

A number of firms have developed their own in-house training programmes, but a major problem with these independent initiatives is that they are neither formally recognised nor accredited by the SETA concerned.

The industry does not have an industry-wide skills development and training initiative.

The technical competence in the industry is not sufficient for the industry to remain competitive globally. It is perpetuated by the absence of technology support structures in the areas of foundry technology (e.g. metal casting simulation; press tool design; product testing; process design, etc).

There is generally lack of common standards that the industry adheres to. The effects of this on the ability of firms to penetrate potential export markets has not been measured, BUT lack of conformance to internationally recognised QA standards such as ISO9000: 2000 or TS16949, will certainly affect a company's ability to export. Lack of common standards partially results from a weak national standards body as well as a lack of education of the appropriate personnel in the foundry industry.

Tooling: the tooling industry remains key for unlocking the foundries developmental potential. The making of moulds and dies, and tooling more broadly is critical to the industry, and critical to product development. Weaknesses in local tooling industry have major implications for late deliveries and serious problems with the quality of cast products produced. Both of these jeopardise the performance of the foundry industry itself. The foundry industry could import tooling to compensate for a lack of local capacity. However, for a truly integrated industry initiative, the tooling industry will have to be strengthened to help the foundry industry meet any growth objectives.

Weak industry organisation: the industry is primarily represented by the SAIF (which deals with the advancement of the sciences related to the manufacture and utilisation of metal castings through education and dissemination of technology and research) and South African Engineers and Founders Association (which focus on commercial aspects, primarily wage negotiations through SEIFSA). The SAIF relies solely on individual membership fees for its income and is operated by a totally voluntary council, with a part time employed secretary. This limits the work that the Institute can do to meet its objectives.

2.5.5 Metal Fabrication (Including Structural Steel)

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93. This sub-sector comprises establishments primarily engaged in forging, stamping,

forming, turning and joining processes to produce ferrous and non-ferrous metal products, such as cutlery and hand tools, architectural and structural metal products, boilers, tanks and shipping containers, hardware, spring and wire products, turned products, and bolts, nuts and screws.

94. Globally, the metal fabrication industry growth is characterised by clusters of firms

developing niche capabilities and drawing on shared services, including technical and design services, skills development and R&D facilities. Automated or flexible manufacturing technologies, computer-aided design/modelling (CAD/CAM); and computer numerical control (CNC) are increasingly being adopted and have had a major impact on sheet metal fabricators by dramatically improving productivity and quality.

95. After first examining issues in metals fabrication broadly, we then assess four specific

segments in more detail. These are structural steel, stainless steel consumer goods, automotive and tank containers. These segments are also the ones in which initiatives have been identified.

Structure and performance of metals fabrication industry10

96. Internationally, growing metals industries are characterised by clusters of small,

specialised firms. Specialisation enables exploitation of niche capabilities, with strong local linkages supporting the growth of wider industry clusters. The intermediate nature of many products means that the ability to design and customise with small production runs (as exist in South Africa) can be an advantage depending on the nature and scale of demand.

97. The importance of quality and delivery for firms’ competitiveness in recent firm surveys

emphasises the importance of building firm capabilities. These include the findings of the recently conducted FRIDGE study on the metals and engineering industries and a survey of manufacturing firms in Ekurhuleni Metro. Rather than competing purely on product price, South African firms had lower design and customisation costs in products for which their main competitors were in Europe and the USA. This points to the importance of ongoing skills upgrading. For example, in introducing computer aided design and precision-cutting machinery the skills of machine operators need to be improved, although the occupational category has not necessarily changed (and so it would not necessarily be evident in more high skilled employment as opposed to medium skilled).

10 Draws on Machaka and Roberts (2004) ‘Addressing the apartheid industrial legacy: local economic development and industrial policy in South Africa – the case of Ekurhuleni’, paper presented at Wits-Ekurhuleni Symposium on Sustainable Manufacturing 10&11 June 2004; Fund for Research into Industrial Development, Growth and Equity (FRIDGE), ‘Study to facilitate the formulation of an Integrated Strategy for the Retention and Creation of Employment in the South African Metals and Engineering Sector’, October 2003; and Mahomed (2003) ‘An Analysis of the Metals and Engineering Services Subsector of the Manufacturing Sector in the Western Cape Province’, CSIR

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98. Obtaining quality accreditation and having access to testing facilities to be able to prove the qualities of a product (its strength, rigidity, resistance to wear and tear) are, however, barriers to small firms and areas where public facilities and support can be of assistance. The CSIR does provide some facilities of this nature. But, they are not necessarily the most appropriate for a strategy oriented to building competitive capabilities.

99. Products dependent on achieving scale economies should also not necessarily be ignored.

These would include tank containers and components for the auto sector, as well as metal packaging.

Cost competitiveness

100. Research has consistently confirmed the competitive disadvantage from the local pricing

of steel. Even where firms have developed relatively specialised capabilities, the cost competitiveness effect of steel prices is of major importance. This has been compounded in recent years by the impact of the strengthening currency, which has led firms to exit export markets and cut back capacity.

101. While wages in South Africa are low compared with countries such as South Korea or

Taiwan, low rates of investment mean that productivity (and hence unit labour costs) is also poor. This is compounded by skills constraints in some areas.

Skills and training

102. As well as being one of the most labour-intensive sectors of manufacturing, metal

products are also intensive in unskilled or semi-skilled labour, which accounted for 64% of total employment in 2002. While the decline in employment in the late 1990s mainly affected this category of labour, skilled workers were also retrenched. This suggests that, in the short-run at least, skills constraints are not binding, as retrenched workers with skills and experience are available. However, it is important to distinguish between overall skills levels in the industry and the changing nature of skills demands in particular areas.

103. The different patterns reported in the surveys between small/medium and large firms,

where large firms are more likely to be retrenching, suggest the importance of improving capabilities at the level of clusters of small and medium firms. The finding of increased labour contracting militates against this, however, as firms are unlikely to invest in building skills-levels where their levels of commitment are low. An additional challenge is the apartheid legacy of white people dominating middle and upper management, and the male dominance of the industry overall. Of concern are findings that the Merseta is not seen as effective by firms’ management and that there has thus been a gap between the ending of apprenticeship programmes of many firms and the establishment of new learnerships. In addition, medium and large firms generally were drawing back the skills development levy, while small firms viewed the time and expense required to do so as onerous.

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Investment and technology

104. The result of poor profitability and very low levels of investment are old machinery and firms lagging behind technological standards. In the context of the importance of being able to compete in terms of quality and design, this is of very great concern. Firms increasingly require computer-numerically-controlled machinery. This is a substantial outlay, and financing the purchase of such equipment may be an obstacle for small firms.

105. In a vicious cycle, weak demand means that firms have not been running more than one

shift, which in turn means that expensive capital stock is under-utilised and margins are thin. More broadly, the FRIDGE study found cost-minimisation strategies being followed across the industry including widespread labour contracting, and increased outsourcing by larger firms. As already discussed, this is not broadly consistent with a long-term path of building production capabilities.

106. The basis for a vibrant, growing metals fabrication and engineering industry is

undoubtedly present. However, a range of factors from weak demand and the strong currency through to high steel prices have meant poor performance in recent years. The potential is demonstrated by the development of particular industry niches despite this overall picture. The industry is also crucial to the development of manufacturing more broadly.

107. A dynamic growth path, however, requires concerted action at several levels.

Internationally competitive steel pricing has the potential to unlock large numbers of jobs across the sub-sector, including in relatively commodity type products. Firms also need to be able to invest to upgrade capital stock.

2.5.6 Structural Steel Industry

108. Structural metal products globally and domestically are largely linked to construction and

building activities, where construction can be seen to be largely civil projects, and building refers to office or residential structures. In recent years, the global world trade in structural steel products accelerated by 11 percent per annum in value terms. Structural products accounted for 2.2 percent of world trade in downstream steel products11.

109. In SA, the structural steel industry is dominated by Group-5, Murray & Roberts, Grinaker-

LTA, McBride and Status. In terms of end-user demand, the South African construction sector has experienced revived growth in recent years, especially on the regional and continental stage, but local activity is also increasing (residential properties). Although the African market is dominated by European, North American and some Australian

11 IDC Downstream analysis, 2000

43



contractors, a number of South African companies have gained market share since 1994. By 2000, the two largest South African companies, Grinaker-LTA and Murray and Roberts, had secured 9 percent of the African market.

110. There are important opportunities in increased demand from higher levels of capital

investment and infrastructure, and in export markets. However, maximising the potential from these opportunities depends on addressing constraints in skills, input pricing, and project and export financing arrangements.

2.5.7 Stainless Steel Consumer Goods (Sinks, Cookware)

111. Over the past years, this sub-sector has been driven by the hollowware and cutlery

sector. There are opportunities in a broader range of consumer goods, including both DIY and garden furniture products. It has already seen the growth of consumer goods within traditional and up-market chain stores as well as in the export of products around the world. However, the downstream industries are still dominated by imports. As much as 75 percent of stainless steel consumer goods are imported, mostly from Asia.

112. One of the key challenges faced by the metal fabricators is the level of technology, which

the manufacturers use in their production operations. The industry has not kept up-to-date with global developments in fabrication technologies, which have moved to automation, usage of robotics, laser cutting, modern welding technology, designs, etc. It is for this reason that the local fabrication industry is seen to be globally uncompetitive as it cannot comply with world-class standards and cannot achieve the required increased productivity.

2.5.8 Automotive Industry

113. Much of a motor vehicle is made from steel. In addition, aluminium and stainless steel

have become increasingly vital in components of the modern motor-vehicle. Aluminium is used extensively to make cast and forged products, such as rims, while stainless steel is extensively used for the manufacture of the exhaust systems, including:

Manifold systems - ferritic stainless steels

Flexible couplings - thin gauge austenitic stainless steel

Silencers - corrosive environment, therefore stainless steel is the ideal material

Catalytic converters - SA is a major player in the global catalytic converter industry. The industry is by far the largest single category of auto components exports, with exports of R8,1 billion in 2003 (a share in total components exports of 38 percent). The industry has grown significantly over the last 10 years, also as a result of the MIDP. The industry supplies about 12 percent of world demand and accounts for about 25 percent of the European market. The industry is founded on South Africa's strategic strengths in the key inputs required for catalytic converter manufacture:

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Platinum Group Metals, which South Africa produces in excess of 60 percent of the world's platinum group metals (PGM's), including platinum, palladium and rhodium, which are the essential catalysts in the converter.

Chromium, South Africa is additionally the home to over 70 percent of the world's resources of chromium, which is the essential ingredient in the stainless steels used to both houses the catalyst and produce modern auto exhausts.

Monoliths, major investments in new manufacturing plants have resulted in this critical component of catalytic converters being made in South Africa by both Corning Inc of USA and NGK of Japan.

2.5.9 Tank Container Industry

114. The tank container industry is the third largest consumer of stainless steel in SA making

up approximately 12 percent of SA stainless steel market in 2003. The main use of tanks produced is for transportation of foodstuffs, beverages, and bulk liquids (such as chemicals). Up to 2003, the industry produced about 6000 tank containers each year and generated export earning of more than R800 million per annum.

115. South Africa tank containers industry used to be a world-leading producer and designer of

tank containers, holding over 50 percent of the world market. It constituted an example of a successful cluster with dti support. More than 80 percent of the tanks produced in SA were sold directly to shipping companies in Europe, Asia, and North America. However, the industry has significantly shrunk from consuming nearly 19 000 tonnes of stainless steel in 1998 to only 6 630 tonnes in 2004. The contraction continued and led to the closure of Trencor Containers and Consani Engineering firms in the mid 2004 and early 2005. Almost 570 jobs have already been lost from the closure of the two firms. The main reasons for contraction are:

The unfavourable level of the exchange rate.

The entry of competitors into the market, particularly China, which let to the fall in tank prices (and subsidies provided to Chinese tank manufacturers). Trencor Containers’manufacturing equipment was acquired by Chinese company Chang Sheng.

Increases in stainless steel prices.

The increasing demand in China for consumer goods has resulted in the establishment of new chemical plants. This makes China a strong competitor in the industry. In addition, these developments pose a threat to the SA tank industry as in 2004 one of China’s tank container manufacturers opened a production line with capacity to produce 6000 tanks a year, almost the same size as the entire SA industry tank production capacity.

116. The capabilities base still exists and there is a need to examine new markets, including

vessels for wine and other beverages, and refrigerated containers.

45



Fig.10. South African tank container production

Source: (Identify) 2.5.10 Jewellery

117. South Africa produces approximately 25 percent of all raw materials for worldwide

jewellery production; however the country contributes less than 0.5 percent to the world’s fabricated jewellery market. The US is the biggest importer of jewellery. There is growing recognition that South Africa must develop the means to transform its comparative advantage as a leading producer of precious metals and stones into competitive advantage in the production and marketing of jewellery for the rapidly growing international jewellery business. As South Africa opened its economy in order to become globally competitive and develop highly manufactured products for export into the global market, these particular characteristics of the gold and jewellery industry prompted a closer look at the prospects for fabrication, especially jewellery manufacturing.

118. A preliminary review of the manufacturing and investment trends in major jewellery

manufacturing countries showed that in order to achieve the re-positioning and expansion of South Africa’s jewellery industry to make it more competitive and to create sustainable jobs, the industry needs to improve its capacity to develop and apply enhanced operations methods and management, as well as its capacity to identify and adopt cluster methods aimed at sharing production costs associated with equipment, facilities, marketing, research, development, training and metal finance. The industry also needs to facilitate direct foreign investment to accelerate the process.

Gold

119. With the recent decline in the market price of gold, jobs have been significantly reduced, resulting in the real threat of mines closing down. Moreover, South Africa is the world’s

0

1000

2000

3000

4000

5000

6000

7000

1987 1989 1991 1993 1995 1997 1999 2001 2003

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main producer of gold (400tpa), yet only 18tpa of gold is beneficiated. Further gold beneficiation is one way of ensuring South Africa maximises its gold resources, increases export earnings and capitalises on its leading position as a gold producer (Metcalfe, 2003). In 1999, South Africa produced 10–12 tons of gold jewellery, whereas world leaders India, Italy, China and Saudi Arabia produced 596 tons, 500 tons, 231 tons and 200 tons respectively.

120. South Africa currently exports approximately 15 percent of its gold jewellery into the

United States, United Kingdom and Australia; the balance is sold on the domestic market. It is predicted that the jewellery industry can double its global market share by 2008, if the burning issues around high working capital, more assertive marketing and training are resolved.

Platinum

121. South Africa is sitting on around 70 percent of the world's platinum reserves, but produces less than 0.5 percent of its platinum jewellery (Engineering News, 2004/11/05). South Africa has the capability to make use of these resources and take a leading role in the global platinum-jewellery marketplace. Historically, growth in the platinum jewellery industry has been constrained by limited access to raw platinum and the cost of working capital. This is gradually changing as a consequence of participation by various platinum producers in supporting the local beneficiation of minerals in the country.

Diamonds

122. South Africa is one of the few countries (along with Russia, Australia and Canada) with activity in all aspects of the diamond pipeline, from extraction through to diamond jewellery retail, providing employment and added value with each subsequent level of processing (Fig. 12). South Africa’s prominence in diamond mining, however, has declined over the years, as many of the large-scale known South African diamond deposits reach the likely end of their life cycles, together with the emergence of new large-scale producing countries such as Botswana and Canada. New opportunities in small-scale mining in South Africa may still exist. In addition, South Africa’s distance from major consuming markets has inhibited competitiveness in the final stage of the diamond pipeline. Some South African retailers have effectively tapped into the tourism market; however, the scale of this tourism opportunity is very small relative to the size of global diamond retail markets – South Africa has less than 1 percent of global demand and a limited presence in the major consuming markets, (such as the US, Europe and Japan), and the emerging markets such as the Middle East, South East Asia and Russia/Eastern Europe.

Fig.12. The SA diamond beneficiation pipeline (Mintek, 2005)

Retail Jewellery

Manufacture

13,000 300 2,100 3,000 9,000

Cutting & Polishing

Sorting & Valuing

Mining Value Chain

Jobs Created

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Source: the dti

Global jewellery market

123. The market leading countries have grown their industries on a foundation of historically

established and culturally driven captive markets and subsequent responses to expanding international opportunities as they evolve. Typically, export opportunities to leading markets often require the delivery of samples which exceed the production capacity of most small and medium sized firms. In order to meet this demand, there has been a purposeful clustering of training infrastructure, production facilities and equipment, access to metal and metal finance, shipping and customs clearing apparatus, supportive regulatory framework and incentives for investment, with secure perimeters for the operation as a whole.

The global demand for gold is driven by two key industries namely gold jewellery

(68 percent) and net producer hedging (11 percent). The balance of demand is derived from markets and sectors such as bar hoarding, dentistry, electronics, official coins, industrial & decorative, implied investment, and medals & coins (Fig. 13).

The worldwide platinum-jewellery manufacturing industry is worth over $10-billion a year, with America, China and Japan the largest manufacturers of platinum jewellery.

World natural diamond production in 2003 has been estimated at a total of 144 million carats with a value of US$9.4 billion. Approximately 20 percent of this volume (28.8 million carats) were gems, which will be polished and set into diamond jewellery, 45 percent were near-gem qualities (approx. 64.8 million carats), with the balance being industrial quality.

More than 90 percent of industrial diamonds are now produced synthetically, and the role of natural diamonds in supplying for industrial applications has therefore diminished.

Fig.13. World gold demand

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Source: Mintek, 2005

124. The following global demand trends have emerged:

Strengthening of the importance of branding, and increased integration of diamonds into the wider luxury goods market sector

Rise in the use of white metals for settings, including white gold and platinum.

Continued dominance of US, Japan and Europe as geographical markets for finished jewellery, but emergence of new markets with increased affluence in emerging and transition economies.

Increased demand for customised items in some key markets.

Continued purchase of diamonds as a gift or for a celebration, but rise in “self-purchase” as a gift to “treat oneself”, in particular for female consumers.

Rise in demand by male consumers, in particular for solitaire rings.

Increased purchase of diamond jewellery as a fashion item by younger buyers, with resultant need to integrate fashion trends into design and materials (e.g. coloured stones).

Increased consumer awareness of conflict diamond issues, and perceptions of exploitation in downstream diamond industry are restricting diamond demand in some markets.

The lower end of the market is showing some signs of considering synthetic gem diamonds as an alternative, but the scale of this demand impact is not clear.

The US consumer product preference provides a wide range of possibilities for South African manufacturing jewellers. Fundamental jewellery includes rings, necklaces, pendants, bracelets, earrings and specialized pieces requiring rare

Net Producer Hedging

11%

Medals & Coins1%

Dentistry2%

Official Coins2%

Bar Hoarding6%

Industrial & Decorative

2%

Electronics5%

Jewellery68%

Implied Investment

3%

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skills to produce. The diverse range, styles, materials and niche products preferences make it a very attractive market to cultivate.

125. Domestic market jewellery initiatives

The Jewellery Cluster Manufacturing Initiative is a product of a partnership between Government and the gold industry. The initiative seeks to establish a platform for the competitive re-positioning and the accelerated expansion of the South African jewellery industry. The Rand Refinery, the principal gold producers in the country, made its unutilised land available to the South African jewellery industry for the project. The complex is such that it will be a hub for both large and small producers working together and supporting one another. Through establishing a critical mass of players and investors, the project will be able to make available gold loans to SMMEs to assist them in developing their capacities to participate in this industry. 1200-1500 square metres have been set aside for a working training facility that will be integrated into the production pipeline of the facility. Here, new talent will be exposed to skilled artisans while working in a real production facility. The platform for skills development is integrally linked into the successful production of high quality manufactured products for the international market. The prospects for meaningful and sustainable economic empowerment of our people are real in this concept.

In line with this thinking and as part of a jewellery cluster manufacturing initiative, the Department of Trade and Industry (the dti), in partnership with AngloGold and Rand Refinery have created the African Gold Zone. This 23 500m2 factory will house independent manufacturers and the dti promised to find markets, bring buyers and attract investors at the launch in 2000, thus reducing export costs for each individual manufacturer. The Jewellery Council of South Africa and its export arm, the Jewellery Joint Action Group (JJAG) intends to promote South African jewellery at overseas trade shows, such as the recent international Jewellery London pavilion and through foreign agents in European countries, as well as in the US and Japan. The JJAG is also considering obtaining rental space in international locations (Metcalfe, 2003).

Already the project has been able to bring together major international players in the area of jewellery manufacturing. It has attracted close to R150 million in investment-a significant accomplishment in the jewellery industry.

Through the Gold and Precious Metal Bill, Government seeks to create the enabling regulatory environment for the progressive development and growth of the gold and jewellery industry. The Bill is to facilitate access to gold and precious metals for beneficiation and other legal purposes while strengthening the regulatory framework and related instruments aimed at terminating illegal trading in precious metals and stones. The Bill will enable us to apprehend and properly punish perpetrators of such crimes.

The establishment of a Jewellery Emporium at the former international Departure Lounge at the Johannesburg Internal Airport (JIA) is intended to be a platform, which will help encourage other companies in the minerals industry to showcase their initiatives by participating in the project. Role players in the initiative include the Department of Minerals and Energy, Department of Arts and Culture, Mintek (houses Kgabane), Harmony Gold, Kgabane, and Airports Company of South Africa.

AngloGold has a 25 percent stake in OroAfrica, South Africa’s largest gold jewellery manufacturer, who has formed a joint venture with Filk Spa, the largest gold chain manufacturer in the world. In addition, AngloGold is assisting in developing an African gold jewellery brand through the establishment of a

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Jewellery Design Centre at OroAfrica (Metcalfe, 2003). AngloGold sponsors the Atteridgeville Jewellery Project. These are among many other projects, such as the Imfundiso Development Project in Cullinan. AngloGold has also created another marketing avenue for gold beneficiation through the Gold of Africa Museum in Cape Town (Metcalfe, 2003).

Mintek and AngloGold created Project AuTek in 2000 to research and develop industrial uses for gold. This investment resulted in a prototype of an air purification unit, using a gold catalyst.

The Public Private Partnership, Musuku Beneficiation Systems, involving Mintek, Harmony Gold and 20 percent shareholding reserved for a BEE company. The company has world-class technology to refine gold quickly, at lower cost and to the highest purity, and focuses on producing a variety of value-added products (Metcalfe, 2003).

Harmony has started a school in Virginia in the Free State to teach jewellery making and design. Despite difficulties, 800 people have got jobs in jewellery manufacturing in Virginia. The Harmony and Implats projects, with Anglovaal Mining’s superalloys project, tied in with Rolls Royce are the result of offset deals stemming from the multi-billion-rand arms deal for ships, submarines, helicopters and jets (This Day, 2004).

The Silplat project is a joint venture between the DME, Impala Platinum, Italian jeweller Silmar, local jewellery producer SA Link and corporate finance house Micofin. The aim of the venture is to establish profitable and sustainable downstream industries, adding value to the metals and minerals mined in South Africa, while creating jobs and skills in the country. Implats has facilitated the supply of metal through the platinum loan, ensuring sufficient supply of the metal to Silplat. Silplat expects to beneficiate more than three tons of platinum a year, generating $100 million in annual sales, 85 percent of it for the export market.

2.6 Cross-Cutting Competitiveness Issues

126. Recent studies agree that, although the downstream industries are heterogeneous, firm

performance is underpinned by firms developing competitive capabilities across skills, technology, design and delivery dimensions. More importantly, the performance of firms can further be enhanced by obtaining competitive input prices and better market access.

Input costs

127. In downstream metal products, basic metals are the most important inputs. The pricing of basic metals (including scrap) therefore has a very significant impact on the competitiveness of downstream firms. The market power of basic metals firms and the distance of South Africa from other major industrial economies means that local firms can be charged much higher prices than in other countries, despite South Africa having amongst the lowest production costs in the world for basic metals. Buyers of basic metals in South Africa commonly pay more than buyers in the EU (deterring investment in South Africa). This places a fundamental block in the value chain between the capital-intensive upstream production of basic metals and the more

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labour-intensive downstream production of value-added metal products. The poor growth of downstream industries also means that a very large proportion of the production of most basic metals continues to be exported. The prices local buyers pay and the prices local producers of basic metals receive for their exports are even further apart (Table 9).

Table 9. Mark-ups of basic metals prices, 2003/04

Carbon steel

Stainless steel Aluminium

SA net export price 100 100 100 EU price 122 120-139 107 East Asian price 101 113 104 SA buyer price 146 130 105-109

Scrap metals

128. The pricing and supply of high quality scrap metal, both ferrous and non-ferrous, to the South African foundry industry is the single most significant issue affecting its competitiveness. It also affects other industries, including stainless steel manufacturing. While the South African industry has a competitive advantage relative to most European countries in terms of energy and labour costs, the industry has struggled to obtain competitively priced, high quality scrap from local scrap suppliers. The international demand for scrap has increased dramatically over the last few years. Scrap exports from South Africa have increased at a rapid rate, partly due to the policies of other countries in effectively subsidising scrap imports. Most of South Africa’s exports of scrap went to Malaysia, India, South Korea, Taiwan and China, all of which have interventionist policies with regard to scrap.

Table 13. Exportation of Scrap Type of Scrap Exports, 1994 (tons) Exports, 2003

(tons) Average annual

increase, % Ferrous 175 000 384 000 9.1 Aluminium 2918 32 950 31.0 129. The international demand for scrap led to an increase in the Rand-price and a

concomitant increase in the share of scrap in the input costs of South African foundries. The exports represent a wasteful loss of what is a basic input. The local conversion of half of the exported scrap in 2003 would mean an expansion in foundry industry output and approximately 11000 additional direct jobs at the current output to labour ratio.

130. These developments led to government’s review of its policy on scrap metal exports,

resulting in amendments to the policy in 2003. The policy changes were not having the desired effect on the industry – scrap suppliers continue to engage in collusive

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behaviour and foundries continue to experience shortfalls in the supply of competitively priced (export parity), high quality scrap from local suppliers. In addition, legal challenges to the decision-making process led to the policy being abandoned in mid 2004.

Electricity pricing

131. The supply of electricity is one of the key input required by primary and secondary as well as downstream (e.g. foundries) producers. The pricing agreements differ between different stages in the value chain – primary and secondary producers get their supply direct from Eskom at pre-negotiated rates while the downstream producers have to pay municipal rates. Input cost prices become inflated where municipality provides the resource e.g. water and electricity and these affect the ability of the downstream industries to be competitive. It is clear that the primary and secondary producers are the main beneficiaries of the country’s competitive advantage in electricity.

132. It is proposed that cost – benefit analysis of municipalities be conducted to gain insight

into the electricity price differentials between Eskom and different municipalities and within the municipalities themselves with the view of developing a strategy to advance the competitiveness of downstream industries.

Skills

133. The metals downstream industries are not only labour-intensive but also employ a significant number of unskilled or semi-skilled labour (unskilled or semi-skilled labour accounted for 63 percent of total employment in metal products in 2004). There are severe skills shortages at artisan, technical and engineering levels. It is also imperative to distinguish between overall skills levels in the industry and the changing nature of skills demand in particular areas.

134. In order to achieve quality control and assurance, technical skills are of importance. Two types of skills, in particular, are required by the industry: engineers and technicians. The demand for these skills varies according to the type of the metal used (ferrous and non-ferrous). But, the basic-elements are generic across different industries.

135. Generally these fields of engineering and technical skills are in high demand:

Metallurgical

Process

Chemical

Mechanical

Mining

Electrical

Software

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136. Most graduates are sourced from local institutions such as:

University of the Witwatersrand

Pretoria University

University of Cape Town

University of Stellenbosch

Mintek

Pretoria and Wits Technikons

137. However, the skills profile in demand is gradually changing as firms are shifting towards

automation and mechanisation using Computer-Aided Design and IT software. While we recognise that CAD/CAM and IT skills are essential to the competitiveness of the industry, even more important is the availability of critical technical skills such as engineers and artisans. CAD/CAM and IT skills have been a component of education at the various tertiary education institutions since the mid 1980's and the lack of these skills in industry supports the fact that tertiary level training by the industry has dropped significantly since the 1980's.

138. One of the biggest constraints faced by industries is a general shortage of artisans.

Critical artisan skills required include:

Welders

Patternmakers

Toolmakers

Machinists

Moulders

Draughtsmen experienced in CAD

Fitters

Millwrights

Turners

Boilermakers

CNC operators

Cutters

IT technicians

139. The lack of skilled artisans is not unique to the metal industry but also across the

manufacturing sector. It is reported that 13 000 artisan apprentices were registered in 1982 and this has significantly declined to only 2 000 in 2003. The 1982 figure was not enough to meet the requirements of a high growth developing economy, so the paltry 2 000 in 2003 has to be totally inadequate. Currently, the average age of skilled artisans across the industry is 45. Although many companies have embarked on internal programmes to train and upgrade both the unskilled labourers and technical

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graduates in specialised artisan areas, it is maintained that such initiatives are insufficient to meet the future needs of the industry. Moreover, as the economy expands (e.g. government’s planned capital expenditure on infrastructure, and expansions in mining industry), technicians and artisans will be urgently needed by both the up- and downstream industries if the opportunities arising from increased demand are to be captured.

140. The constraints faced by the industry can be summarised as follows:

Aging workforce

Historically, firms such as Eskom, Iscor and Spoornet used to provide training to young people. This provided a pool of skilled people from which industry could draw from. Since companies scaled back their training programmes, the skills shortage has accelerated.

The widening gap between taught theoretical aspects of engineering and metallurgy and its application to an industrial setting. The industry asserts that the universities do not include enough practical and hands-on experience in their training programmes.

Technical sales skills and project engineering capabilities - it is very difficult to find qualified engineers with both good sales and technical abilities.

It is very difficult to attract graduates from technikons and universities to work in industries because wages offered are low relative to the service sector and industries are not as glamorous in the eyes of young professionals.

It is difficult for smaller firms to recruit students because by the time the students graduate, they already have jobs from bursary commitments either from the mining companies or the large and multinational firms.

It is becoming a problem to source machinists with high-tech capabilities – particularly who will be able to work in a three-dimensional (3-D) context/environment.

There is general lack of quality control and quality assurance skills.

The current quality of management skills is also poor, yet companies are unwilling to sacrifice productive working time for management development through training.

As part of fulfilling the requirement of Employment Equity Act, companies are currently trying to increase the number of black engineers employed, but there is a scarcity of skilled black engineers.

Technology

141. Improving firms’ technological capabilities is fundamental to increasing the

competitiveness of the South African metal downstream industries. Not only do firms need to upgrade their equipment in order to remain competitive, but there is also a need for the provision of industry-wide, coordinated R&D and technical support services to firms as an essential component of any initiative that aims to increase competitiveness.

Research and development

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142. Due to lack of a coordinated R&D programme within the industry, most firms have resorted to product adaptation and not so much new product development. Most of the products are based upon understanding the work environment (i.e. the performance of products in the production chain), rather than any fundamental research. In addition, ongoing technological development itself requires the ability to test products to determine and improve specifications. Lack of R&D activity is perpetuated by the fact that there are no structures encouraging collective research efforts, testing facilities and technology transfer whether at the industry-wide or sub-industry level. These areas can be addressed in the form of ‘technical centres’ under the Advanced Manufacturing Technology Strategy, while the need to build links between firms underpins the conception of ‘innovation centres’.

143. R&D activity is very important if we want the industries to move towards specialisation

(in production processes) and product diversification. Currently, the non-ferrous metals industry is fast growing on the back of an expanding automotive sector. However, as more industries require non-corrosive and lightweight metals (as in aerospace, boat building etc), the metal downstream industries, metal fabrication and foundries in particular, require a coherent and cohesive R&D programme to capture these opportunities. The programme should embrace building international alliances to enhance competitiveness.

Investment

144. Technologies are generally embodied in machinery and in the organisation of production. This requires investment in upgrading capital equipment on an ongoing basis. Low investment rates, as have been experienced in South Africa in the past decade and more, mean firms fall behind the pace of technological change. In SA, very few firms have acquired the latest technology such as robotics, CNC machines, and laser cutting tools to improve their production techniques and this has resulted in improved productivity and efficiencies.

145. Where firms have invested in modernising their production techniques, research findings

show that in downstream metals industries this process is part of an overall improvement in competitiveness and is not at the expense of labour. Upgrading capital stock seems to induce relatively strong dynamic effects with respect to employment growth. Those firms that have not moved up the technology intensity curve, have been and will remain vulnerable to imports, and their ability to maintain existing and penetrate new export markets, is weak. Exchange rate volatility and access to finance have been cited as key impediments to upgrading the machinery and equipment used in the industries.

Tooling

146. The moulds, tools and dies produced for the South African market must often cater for much lower production runs compared to their counterparts in Europe and North America. This scenario often forces the South African tool rooms to supply lower

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quality, lower priced tooling solutions. Consequently, the tool rooms are only able to recover minimum profits and hence they do not have the funds to invest in proper operational systems, training of personnel and equipment. With the lifting of sanctions, the tool making industry could not respond effectively to the new wave of competition, because it did not have the infrastructure to do so. The lack of formal training programmes for the industry, coupled with a severe skills shortage, aggravate the situation even further. This situation has deteriorated over the last ten years.

147. The training problems in tooling are a result of:

Lack of foresight and, more importantly, co-ordinated action. Previous attempts have been made to address tooling, but none have progressed.

The relatively poor training outputs from Technikons. It is not just a case of being able to maintain existing standards. The key challenge is to continually improve and keep pace with international developments.

The falling away of support to the industry which had been in place because of links into defence spending. Historically, this had positive spin-offs across many industries, metals, machinery and plastics in particular. It has still to be replaced with a clear set of technology missions, which will underpin the growth of industrial capabilities.

148. An uncompetitive and poor performing tooling industry has major implications for metal

downstream industries, especially for the South African automotive industry which is experiencing tremendous challenges to improve its competitiveness in an increasingly aggressive international market. Tooling is an important activity for the auto industry as automotive related products account for more than 50 percent of tool making activities globally. Therefore, there is a clear need for South Africa to restructure its mould, die and tool making industry to become more effective.

149. The restructuring, however, has to be done on an industry wide basis and it will require

government to be part of the development. Government support includes supporting the current national tooling initiative launched by the CSIR’s National Product Development Centre, which was initially driven by the auto sector. From the industry side, Tooling Association of South Africa (TASA) has been instrumental in trying to develop a large plastics tooling industry forum around 2003. The association has since moved towards developing a more structured approach to reviving the tooling industry, driven by its members (corporate companies providing tooling in the plastics and metals industries). As already noted, the machine tool industry forms a vital base for national defence, aerospace, marine, automobile, electronic, and machinery industries. For this reason, government should promote projects that integrates the machine tool, moulding machine, and components industries to benefit from boosting technology upgrades and transformation.

Tooling is fully addressed and identified as one of the key actions programmes in the Capital Equipment and Alliance Industry CSP.

Market Access

Access to local markets

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150. Market access for many metals suppliers depends on the procurement practices and policies of the end-user they supply to. For example, a cast product is usually a component for large equipment (for example, an impeller for a pump) and it is usually sold to an original equipment manufacturer. The equipment is then sold directly to an end-user (mine) or to an intermediary (engineering firm). In a case of a fabricated product, e.g. pipes and tanks, it is generally procured directly by the end-user. Therefore, how the firms gain access to markets depends on these interactions, and how far the supplier is from the end-user. Increasingly, relations are defining the firms’ market access. Companies/end-users are driven by the need to reduce costs, reducing maintenance and improving efficiencies. Therefore, they will procure from a supplier that offers a “total solution” – reliable supply, maintenance, replacement parts, etc. While this kind of procurement approach has resulted in firms developing production capabilities in certain product lines, it is very difficult for new suppliers to penetrate such relationships. With the government’s emphasis on promoting SMMEs development and increasing sourcing from BEE firms, these are particularly important factors.

Access to international markets

151. The export performance of the metals downstream industries is very diverse and it is generally tied to the particular industry to which the firm supplies. Most firms export their products indirectly through the end-user. For those industries that have been able to export, very few are exporting high-value products. Some of the reasons for such performance:

Lack of subsidies

Tariffs in potential markets (e.g. China)

Anti-dumping duties

Non-Tariff Barriers (standards; environment; certification; etc)

152. Other important difficulties faced by exporting firms include information gathering – to

know where the opportunities are – and financing of exports – working capital. These factors are significant constraints to small firms for whom funds are limited, especially if they do not have alliances. Many down-stream fabricators indicate that, because of the distance from the market (and the resulting risks associated with interruption of supply links), many overseas buyers demand a substantial discount from ruling prices (between 10 -20%) to place business with SA companies.

153. Another critical factor to accessing the international market relates to the level and the

stability of the exchange rate. Given that many firms do not hedge against currency risk, they are very susceptible to exchange rate fluctuation. This means a high level of uncertainty and risk in exporting, while developing an export market may require an investment stretching many months or years. In the recent months, many firms lost their export competitiveness due to the appreciation of the currency. Many firms had to absorb the costs and resort to minimising in-house costs.

Logistics

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154. Logistics have become a cost factor in industrial development. SA has a well-developed transport infrastructure, however, the transport sector suffers from chronic underinvestment, uncompetitive costs, and inefficient operation. Given that the metals industries are concentrated in the East Rand, logistics is a huge cost factor for those firms that export. The performance, or lack thereof with regard to railway transport, as well as its high costs, are the biggest constraints faced by the industry. Not only is there no guarantee regarding delivery, sometimes products are damaged.

155. Furthermore, while rail transport should be significantly cheaper than road, it is not. Time

delays in delivery of inputs, means that companies are required to carry greater stockpiles of raw material inputs resulting in a higher cost of production. Unreliable railway transport also has a negative impact on meeting export orders and this is forcing the producers to use road transport. The issue of transport costs is a serious impediment to beneficiation and export growth.

Demand growth

156. Investment in infrastructure will become an important source of demand for metal products firms, especially those making structural metal products. Also, the recent shift in government policy towards sustained annual increases in government investment will stimulate demand for this sector. There will be wider multiplier effects from increased government spending which will, through generating growth in the economy as a whole, also feed through to growth for metal products in general. For example, increased provision of housing means more demand for fridges, cookers and general hardware products.

157. In addition, the growth in the automotive industry has had a significant impact on the

metals industries, particularly on the fabricators and foundries. It is envisaged that if the growth of the automotive industry is sustained, these metals industries will grow in both output and employment. The expected expansions in the mining industry, both locally and in Africa, will also result in positive spillovers for the metals industries. With greater export facilitation by government, the sector can increase its levels of export, particularly to African markets, and will have a greater impact on job creation.

158. An important issue for the coming years, therefore, is how to ensure that bottlenecks to

growth of the sector do not become binding, meaning local demand being met by imports rather than domestic production. These bottlenecks include skills and training, access to finance for small firms to grow, facilitating the take-up of available factory space and, importantly, appraisal of procurement policies and BEE issues.

Procurement and BEE

159. Government, parastatals and mines are increasingly working towards meeting BEE targets in their procurement strategies as part of the broader national drive towards transformation in the economy. These procurement policies have major implications for increasing beneficiation and growing the metals downstream industries. There are a number of issues regarding the implementation of the process that need to be noted

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and taken cognisance of in order to ensure the future vibrancy of the metal industries broadly and to ensure future demand opportunities are captured:

There is a general misunderstanding of what BEE encompasses and requires. The general perception in industry is that BEE is all about increasing equity ownership rather than broad based economic development. While clear targets have been set for industries such as the mining industry (particularly at the mines level), there is little to guide the efforts of firms in the downstream industries. BEE should be linked to a supplier development management programme. A balance has to be achieved between meeting the objectives of transformation and growing the economy.

At present, fulfilling BEE requirements is primarily based on the equity composition of the holders of the firms concerned. There is no “degree of local manufacturing content” in the fulfilment of BEE obligations. A black distributor of imported components is therefore favoured over a local white manufacturer, regardless of the number of South Africans employed within the firm. It is therefore imperative that BEE procurement legislation encompasses a ‘local content’ dimension in addition to being equity focused if the future of the industry is to be maintained and broadened. This relates to issues of BEE fronting and the increased penetration of foreign products.

Many of the smaller firms are family-owned and are generally reluctant to sell equity. Small family-owned firms argue that their reluctance to sell equity to BEE companies or individuals has to be seen in the context of their individual operations. For many of these companies, the growth and expansion of the firm has not been an easy accomplishment and has often involved using personal resources (e.g. mortgage bonds) as collateral in securing financial assistance from banks. Competitiveness is, moreover, embodied in the skills and capabilities of the founding designers and engineers of the firms. Given the risks they have undergone, such companies are prepared to take on BEE partners provided they can add value to the operations. Critical challenges facing the industry include finding BEE firms and individuals with compatible skills and expertise and then retaining them.

Over-zealous focus on BEE issues can result in business being lost by SA manufacturers. There have been instances where a BEE company, acting purely as an import agent, has taken business away from the local producer of the product. This generates un-intended distortions in the market, and loss of real value added employment in SA.

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Chapter 3 Sector Strategic Plan

3.1 Strategic Vision

160. It is envisaged that by 2014, SA will have a globally competitive metals sector, optimally

utilising the comparative advantages of abundant mineral resources, skilled labour force and world-class technologies to produce and market high value-added products in the prioritised industries.

3.2 Longer-Term Direction

161. The following are key focus areas / broad strategic themes that will maximise the impact

in achieving the strategic vision:

Ensuring policy coherence across all spheres of Government

Beneficiating economically viable abundant natural resources placing emphasis on downstream industries where there is high labour absorption

Increasing global competitiveness of the sector

Accelerate investments and exports

Supporting focused and coherent approach to R&D and skills development

Implementing logistics and supply chain management strategy

Explore possibilities for import replacement to maximise local demand

Building partnerships along the value chains

Ensuring compliance with required international environmental standard

Reviving web based “Sectoral Prospects”

Developing and maintaining a customised training programme to support the Customised Sector Programmes

Implementing the metals & engineering sector summit proposals

Competitive input pricing regime

3.3 Key Strategic Challenges

162. Key strategic challenges within the metals sector that retard the economic aspirations of

Government - improvement of competitiveness, enhancement of exports, attraction of local and foreign investments, maintenance and creation of new employment, and encouragement of broad based Black Economic Empowerment:

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Lack of coordination and leadership

Uncompetitive input pricing in the metals sector

Insufficient beneficiation along the value chain particularly on downstream industries

Surge in the importation of manufactured metal products

Threat of imports to public and private capital expenditure projects

Low global competitiveness levels

3.4 Key Action Programmes

163. The following key actions programmes have been identified to address the key strategic

challenges:

STRATEGIC THEME KEY ACTION PROGRAMME A Coordination and

leadership 1 Establishment of a sector support facility

2 Establishing a competitive input price regime in

the metals sector B Beneficiation and

investments 3 Promoting beneficiation of metals

C Demands from

government’s capital expenditure and major private sector projects

4 Maximise local content through backward linkages

5

Establishing an import monitoring system D Global competitiveness

6 Upgrading production capabilities in

downstream industries

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Chapter 4 Sector Implementation Plan

164. For each key action programme this document describes the key strategic challenge

within the sector that retards competitiveness, exports and investments as well as employment, and equity - in order to justify the government’s intervention, it is likely that the key strategic challenges identified will not optimally resolve themselves and that there is a clear role for the government. The key action programmes together with related interventions, which contribute to the strategic vision of the metals sector are also described in detail. The expected outcomes from successful implementation of the key action programmes are noted, as well as the key performance indicators.

165. The key action programmes are broadly divided into four key strategic themes, namely:

Coordination and leadership

Beneficiation and new investments

Demands from Government’s capex plans and major private sector projects

Global competitiveness

4.1 Strategic Theme A: Coordination and Leadership

166. The Metals sector comprises of a diverse group of industries, which span a number of

value chains. It is this diversity of character and vested interest that make policy coherence such a major obstacle. At national level there are 9 government departments and or public institutions involved:

Department of Trade and Industry – to provide a conducive and enabling

environment for industrial development

Department of Science and Technology – to resolve the technology chasm in key industries of the economy

Department of Minerals and Energy – encourage greater beneficiation

Department of Labour – to resolve the challenge of scarce and ageing skills necessary for the growth of downstream metal industries.

Department of Public Enterprises – ensure the planned capital expenditure on infrastructure generates greater economic spin-offs to the rest of the economy.

Mintek – R&D

CSIR - R&D

Industrial Development Corporation (IDC) – future funding programmes are aligned to key sectors with potential to unlock constraints to economic development

Merseta – skills development and training

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167. This situation is further exacerbated at industry level, where there are 14 industry

associations representing diverse and sometimes conflicting interest groups.

4.1.1 Key Strategic Challenge: Lack of Coordination and Leadership

168. There is no shared vision and strategy across government for development of the metals

sector. Development of the metals industries is included in Cabinet’s MERS of 2002, the Advanced Manufacturing Technology Strategy of DST, the concern of DME with beneficiation and with the effects of electricity pricing on industrial development, and with the mandate of institutions including Mintek, CSIR, IDC and Merseta. While all departments and institutions share common goals of economic development and employment creation, these goals need to be realised in agreement on a strategy for the metals industries.

169. There are cross-cutting areas such as skills and logistics which are very important for the

metals industries but require co-ordinated action across government in ways which meet the specific needs of industry.

170. Agreement at a strategic level further needs to be taken forward in clear co-ordination

mechanisms for ensuring consistency of the roles of different institutions. Government has many tools to leverage industrial development, ranging from electricity pricing and infrastructure provision to incentive programmes. These tools need to be employed in consort. The following steps are suggested:

Identify levers and the roles of different institutions and branches of government

alongside the dti: DME, DPE, IDC, Merseta, CSIR, Mintek etc

Ensure co-ordinated approach to utilise the levers e.g. electricity pricing, transport infrastructure, skills and funding of new investments etc.

Identify main policy fields, and ensure alignment, including across: DME beneficiation committee, Skills development framework, Advanced Manufacturing and Technology Strategy.

Ensure consultation and inputs from stakeholders – industry and labour, and their participation in driving specific initiatives at operational level.

Address the co-ordination problems in skills and logistics through effective inter-government and government - industry actions.

4.1.2 Key Action Programme 1: Establishment of a Sector Support Facility

171. The programme proposes setting up of a leadership group that will be made up of

Government, Business and Labour. This leadership group will be responsible for overseeing progress in implementing the strategic themes as described in Metals CSP, as well as to monitor, review and modify the strategy.

The goal

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172. In the short-term: Establish a sector support facility where all participants can monitor, review and modify the Metals CSP strategy. In the long-term: Create 45,000 recovered and sustainable direct jobs.

Obstacles to implementation

173. Weak institutional capacity in the value chain

174. Lack of agreement on common strategy and/or levers

175. Poor implementation and information flows for monitoring progress

176. Insufficient funding for implementation processes

177. Stakeholder participation dominated by particular interests (such as upstream industry) rather than overall vision.

Interventions to remove each obstacle

178. Establishing and maintaining Nedlac Metals Policy Forum and Metals Sub-Sector Implementation Group (MSSIG) to co-ordinate the implementation of the strategy based upon an approved 5 year business plan as indicated in Fig 14 below:

Fig.14 – Metal Sub-Sector Implementation Group (MSSIG)

Government Composition: the dti, DME, DPE, DOL, DST, NT, DOT, MINTEK, IDC, CSIR

Organised Labour Composition: NUMSA, Solidarity

Business Composition: SEIFSA, SAISI, AFSA, ACA, SAIF, NAACAM, MRA, SAISC, SAIW, SAWA, STFASA, SAISF

Nedlac Metals Policy Forum

Metals Sub-Sector Implementation Group (MSSIG)

Nominations by social partners (rotating chair, secretariat – Nedlac)

MSSIG OPTIONS: Infrastructure - Shared between the dti and Industry Core team - Project champions - Contract in service providers

Leadership - Shared between the dti and Industry

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179. Resource adequately within the dti and externally.

180. Ensure a consultative process throughout implementation of CSP programme.

181. Reporting mechanisms of this structure should be developed to complement the dti

reporting requirements.

182. Use of the dti wide instruments.

183. the dti will invite potential participants to ensure balanced representation.

184. Set up operational groups with specific industry grouping to cater for implementation of

plans.

Levers required

185. the dti budgets

186. Industry contributions

187. EXBO mandate for CSP and its updates

188. Capacity to implement plans

Progress made to-date

189. There exists information sharing and coordination forums in relation to the development

of the following policy processes:

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Beneficiation strategy

Industrial policy

Government’s Capital Expenditure Programme

Resources required

190. Supported by the sector, the dti will champion this project at a cost of R7 000,000 per annum over the next 5 years to develop and implement the business plan.

191. Effective management unit at the dti, including capacity to monitor and drive teams for each initiative.

Risks and mitigating actions

192. Lack of commitment by government and only low-level participation. Seek buy-in at the dti EXBO in order to facilitate the involvement of other government structures at senior level.

193. Continued development of multitude of policies with weak implementation. Budgets and

project champions to be appointed to drive implementation.

Implementing group and champions

194. the dti – to manage the sector support facility

195. The DGs cluster for economic development to be involved as required

196. Business

197. Labour

Expected outcome

198. The expected outcome would be a coordinated implementation programme of priority interventions as identified in the Metals CSP as well as the Metals and Engineering Sector Summit Process.

Key performance indicators

199. Establish sector support facility with clear workplan and mandate within 6 months from date of approval

200. Metals CSP objectives and programmes being incorporated into strategies and plans of

relevant institutions

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201. Key Action Programme (KAP) implementation groups established to drive each industry

initiative with clear deliverables and timelines

202. Implementation by end 2006

4.2 Strategic Theme B: Beneficiation and New Investments

203. Beneficiation or value-added processing involves the transformation of primary material

to a more finished product, which has a higher export sales value. Each successive level of processing permits the product to be sold at a higher price than the previous intermediate product or original raw data material due to value add at each stage. The concept of beneficiation in South Africa took major steps forward during the 1990s the key being to establish South Africa as a base for adding value to raw material inputs from anywhere in the world, not only domestic resource. During this period, the South African mining sector underwent major transformations away from gold into higher value-added processing and manufacturing, becoming a world exporter of processed minerals as opposed to its previous role as a predominantly primary commodity exporter. This transition resulted from the construction of a number of large-scale, resource-based investment projects such as Columbus Stainless, Hillside Aluminium, Namakwa Sands and Saldanha Steel in addition to the continuing expansion of ferro-alloy production.

204. Despite these developments, South Africa still has the potential to further raise the level of beneficiated mineral output. In 2004, South Africa’s first stage of beneficiation, which is characterised by capital-intensive plans with low employment levels accounted for nearly 90% of the total minerals revenue, with the other 10% coming from entirely beneficiated minerals, including partial commodities.

205. Government is committed to the promotion of beneficiation and the Mineral and Petroleum Resources Development Act of 2002 includes provision that will ensure that the government promotes the establishment of secondary and tertiary mineral-based industries, aimed at adding maximum value to mineral raw materials, where economically justifiable. The South African Mining Charter of 2004 specifically stipulates that mining companies will be able to offset the value of the level of beneficiation achieved by the company against its HDSA ownership commitments.

206. The metals sector is very diverse and the upstream industries are well-established and globally competitive. Fixed investment and output in the steel and aluminium upstream industries have grown healthily in the recent years whilst shedding labour. Their export performance has significantly improved with the exception of the impact of the strong Rand in the past 2-3 years. The growth in the export performance in the ferrous industries has been at the back of the economic boom in China while in the non-ferrous has largely been driven by the automotive industries and the greater use of aluminium industrial applications.

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207. On the other hand, the downstream industries had little growth in investment and output,

while minimal increase in employment has only been experienced since 2000 (refer to chapter 2). These industries have not reached their full potential due to factors already discussed in chapter 2. One of the key substantive problems contributing to the poor downstream manufacturing base is import parity pricing practices of the concentrated upstream sector. With the government vision to half the unemployment by 2014 and create a world-class manufacturing industry, it is imperative to address the constraints to beneficiation.

4.2.1 Key Strategic Challenge: Uncompetitive Input Pricing in the Metals Sector

208. The South African economy has abundant production of basic metals including scrap in

excess of the demand by local downstream and relatively labour-intensive industries. The benefits of this production are not being realised in terms of it being priced competitively in the local economy. There are two specific problem areas:

Pricing of basic metals by producers of steel, stainless steel and aluminium

Pricing of scrap metal

209. Competitive pricing, which would reflect the large net exports of these metals currently,

would greatly improve the competitiveness and growth of downstream industries, adding value and creating employment. In addition, lower prices would reduce inflationary pressures and reduce the costs of inter alia the government’s capital expenditure programme.

210. Statement of substantive problem – import parity pricing:

Import parity pricing means pricing as South Africa was uncompetitive, had relatively high production costs and was a net importer of basic metals – the exact opposite of the reality. It therefore means prices that include notional costs that are not incurred, as the actual situation is one of production far in excess of local demand for basic metals and large net exports. The import parity price is typically calculated by taking the price of a notional import source and adding costs of:

International shipping

Related costs such as insurance and financing

Wharfage and related port charges for off-loading

Import tariff

Local transport costs

211. Import parity prices are typically charged on the following products:

Carbon steel (flat and long products)

Aluminium products (especially flat products)

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Stainless steel - where prices have not always been at import parity levels, with the strength of the Rand in recent years, have in fact been above import parity levels

212. The difference between the export price actually received by local producers of basic

metals and the import-parity price charged to local buyers of basic metals ranges up to 40 percent higher local prices in the case of carbon steel to around five to ten percent for aluminium.

213. Local firms beneficiating basic metals in South Africa thus pay higher prices than firms in

other countries. Prices are above those charged in the EU and much higher than prices in other net exporting countries such as South Korea, Taiwan and Japan. This means local firms are not internationally competitive and South Africa is not an attractive location for investment in downstream beneficiating metals activities.

214. Statement of substantive problem – scrap metal:

Scrap is considered is an important input into the beneficiation process and can create competitive advantages in the foundry and primary metals industries. These industries are in turn key starting points for further value addition processes. However, the pricing and export of scrap metal is a problem in the iron and steel sub-sector and a major impediment to the growth of non-ferrous downstream processors. These two factors have major impact on the competitiveness of the downstream industries and as the sub-sectors are relatively labour-intensive, they are major impediments to job growth. The effect of scrap pricing on the downstream industries is not as severe as the unavailability of the material due to the fact that large quantities are exported (refer to chapter 2). Therefore, addressing the exports of scrap should be central to the strategy.

215. Opportunities if problem is addressed:

Rapid growth and employment: import replacement, exports

New investment (tank containers, auto)

More equal playing field and so downstream more competitors

4.2.2 Key Action Programme 2: Establishing a Competitive Input Price Regime in

the Metals Sector

216. the dti is taking a number of measures to address the challenges of IPP and exportation

of scrap metals in an effort to ensure competitive costs into downstream industries.

217. The following actions have been identified to address the IPP issue:

Commissioned studies into pricing policies in carbon and stainless steel and aluminium

Engaged in negotiation with Mittal with the objective of arriving at an end point of no price discrimination between export and domestic pricing

Investigate possible strengthening of the competition law relating to price discrimination, excessive pricing and price monitoring

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Possible linkage between government support schemes and non-discriminatory pricing policies

Reduce import tariffs

Raise awareness of the affects of IPP at the highest level of Government

EIDD division has been tasked with resolving this IPP issue

218. To retain scrap locally for further processing, the following actions are planned:

Investigate and propose possible options for the retention of the export of scrap

Implement interventions, which will deliver on above objectives.

The goal

219. To facilitate the increase of beneficiation by a factor of 4.5%12 per annum.


IPP:

220. In the absence of regional competition, pricing policies are left to the dominant players.

221. Negotiations with upstream firms without concrete commitments.

Scrap metals:

222. Insufficient reliable data on scrap to evaluate and implement appropriate interventions.


IPP:

223. Introducing competitive input pricing and price monitoring systems through the

strengthening of the Competition Law.

224. the dti is involved in ongoing negotiations with upstream firms.

Scrap:

225. Implementing Scrap Beneficiation Initiative (SBI)

12 The cumulative annual growth rate of sales volume at constant 2000 prices over twelve years was 3.4%. The CSP interventions are expected to increase this rate by 30%, thus increasing the average future growth rate to 4.5% per annum.

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Levers required

226. Obtain mandate to implement proposed interventions.


227. Steel: the dti has started engaging Mittal Steel SA on developing a pricing model to support the downstream industries, with principles that it is recommended that the domestic price should be based on no price discrimination against the export price. The domestic prices should also reflect the low production costs in South Africa as reflected or indicated on the world cost curve.

Price comparison data is being analysed.

Cost benchmarking data analysed, and currently in negotiation.

228. Scrap: A number of control policies for exporting scrap were tried in the past by the dti.

The last policy was withdrawn due to legal challenges to the policy, which depended on self-regulation by the industry stakeholders. Study on the scrap industry is being commissioned.

Resources required starting from a zero base

IPP

229. Access to international benchmarking data.

230. Capacity to analyse data.

Scrap:

231. Research and benchmarks on scrap recycling industry.


IPP:

232. Lack of commitment to domestic market by upstream firms controlling basic metals production. Engage upstream firms as part of the consultative process.

233. High costs associated with upstream production. Require continued attention to needs of upstream firms in other areas (logistics, infrastructure needs, meeting environmental standards, etc).

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Scrap:

234. Metal Recyclers are against possible restrictive measures. Engage metal recyclers as part of the consultative process.


IPP

235. Championed by the dti and supported by the Metals Sub-Sector Implementation Group (MSSIG)

236. Competition Authorities

Scrap:

237. Championed by the dti and supported by the Metals Sub-Sector Implementation Group (MSSIG)

238. ITAC

239. Scrap recycling industry

Expected outcome (potential net economic benefit)

240. Interventions on steel (both carbon and stainless) and aluminium pricing and scrap

export policy will yield immediate impacts, increasing the competitiveness of the local metal products industries relative to imports, and in export markets. Study commissioned to evaluate the economic benefits.

Key Performance Indicators

241. Pricing comparable with other low cost countries.

242. Increased beneficiation: lower exports of basic metals and improved trade performance of downstream manufacturers.

243. Incentives and support programmes (including IDC lending) being increasingly utilised by downstream firms.

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4.2.3 Key Strategic Challenge: Insufficient Beneficiation along the Value Chain,

Particularly on Downstream Industries

244. Although South Africa is well endowed with minerals, the level of mineral beneficiation is

very low (refer to chapter 2). There is a range of specific projects, each representing beneficiation of South Africa’s metals products through development of capabilities in specific products to meet an identified market. There are generic challenges and actions involved in such projects, and issues specific to each. The generic issues in increased beneficiation projects are outlined, which refer to the cross-cutting issues tackled in the CSP. Each project is then addressed in terms of its unique challenges and opportunities.

4.2.4 Key Action Programme 3: Promoting Beneficiation of Metals

4.2.4.1 Project 1 of 2: “Profits from Processing”13

The goal

245. Increased beneficiation by identifying, scoping and attracting new downstream metal

products manufacture, through addressing input costs (mainly to do with the pricing of basic metals) requires new investments and expansion of capacity to realise the potential gains. This implies the development of production capabilities to meet identified markets demands and opportunities thus completing gaps in metals value chain


246. Lack of understanding of value chain by sectors to identify opportunities

247. Insufficient interaction with industry

248. Uncompetitive investment climate

249. Small domestic market


250. Revive and maintain “Profits from Processing” to complete metals value matrices and

profile investment opportunities.

13 A publication which defines the value chains of South Africa’s most important minerals

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251. Appropriate incentives to stimulate private sector decision-making and risk-taking: review

of incentive offerings against industry requirements and comparison/alignment with competing investment locations around the world, as proposed in project 2 of Key Action Programme 3

Levers required

252. Funding to update “Profits from Processing”

253. Funding of scoping of identified projects


254. The CSP Metals Sector is finalising a project to update “Profits from Processing”.

255. Some of the more important projects are indicated at the end of this section.

Resources required from a zero base

256. Project cost of “Profits from Processing” including project scooping is estimated at R10

000,000 over 5 years


257. Negative project evaluations. Internal rate of return for projects to be above hurdle rates

expected by investor


258. This project will be championed by Mintek and supported by the MSSIG

Expected outcome

259. New investments, growth and employment

260. Co operation between the IDC, TISA’s CSP and Investment sections

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261. Number of investment projects scoped.

262. Successful implementation of majority of identified projects under this initiative of CSP

within 24 months.

263. Identification and scoping of projects.

264. Examples of targeted beneficiation projects within the Metals Sector:

Reefer Containers

Refrigerated containers are one form of intermodal container transport, in which there has

been huge international growth.

South Africa has a developed base in container manufacture, and reefer containers represent a market niche in which to apply these production capabilities. SA already uses about 40,000 reefers per annum to export perishables, which represents an immediate market for a local manufacturer. South Africa also has an advantage as the container can be transported full on its initial voyage, whereas if manufactured in China (the major current competitor) this will not be the case

Opportunity requires:

Linking with major international container leasing company

Providing initial investment incentives

Competitive input material pricing

Stainless Steel Auto Exhausts

SA has a huge catalytic converter (catcon) industry with almost all major international

players present.

Approximately 50% of catcon revenue is from PGMs (i.e. little value add)

Induce catalytic converter manufacturers to move to producing full exhaust systems, with greatly increased stainless steel and local labour required

With the existing levels of catcon manufacturing, if all were exported as part of systems this would lead to approximately 4000 additional jobs, with additional jobs being created in

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the additional capital equipment required in the tube industry and elsewhere

Levers to make this attractive would include:

Allowing a greater value of PGMs in catcons to qualify for MIDP if part of full system

Linking to beneficiation clause of Mining Charter, or rebate of proposed Mining Royalty Tax

Additional incentives for relocation of activities to SA and to encourage the fixed investment necessary

Stainless Steel Precision Strip Mill

Involves rolling stainless steel to be very thin (0,3-0,1mm) so that it can be used in range

of applications in the auto, healthcare and household product industries.

Applications include: flexible connections, gaskets, hypodermic needles, pens, razor blades, heating elements, catcon substrata, computer drive parts.

Flexible couplings are currently manufactured in South Africa (SA has 9% of world market, with 30% growth pa) used in exhausts etc.

Precision strip mill means building local linkages from producing industries (Columbus with optimum gauge of >0,6mm) to using industries (exhaust and catcons) currently importing inputs.

The increased local content is incentivised by MIDP, and during the construction and commissioning phase of the mill, imported strip (from Columbus steel) will qualify for MIDP;

Precision strip mill estimated to provide 240 jobs in construction and 180 permanent jobs in operation

Metal Product Development Initiative Currently South Africa is a large exporter of long and flat steel products and an importer of

higher value-added wire products

The metal park proposal aims to address this by combining competitive conditions with support for SMMEs, an industry partnership, links with international partners etc.

The metal park is not limited to a specific geographic location, but is a set of initiatives with a common goal and support measures

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It will involve partnerships (local and international)

Incubator and SMME development programmes

Increase beneficiation through developing jewellery industry In the case of jewellery, the country produces approximately 25 percent of all raw

materials for worldwide jewellery production; however the country contributes less than 0.5 percent to the world’s fabricated jewellery market

There are greater economic gains that can be achieved if jewellery production/certain parts of fabrication can be localised. The growth of the jewellery sector is a priority for government and part of government’s vision for sustaining the future of the mining and minerals industry through value addition

Statement of substantive problem

Security of supply

Access to affordable metal financing

Lack of manufacturing capability to take advantage of the mineral wealth advantage.

Opportunities if problem is addressed

Increased value-added products

Growth in jewellery output and employment

Market opportunities from free trade agreements: AGOA and the EU

The actions, which form part of the programme, were formulated on recommendation of the FRIDGE Kaiser studies and diamond cutting industries as well as beneficiation efforts resulting from the mining charter. The focus to-date has been on:

Provision of a gold loan to place 1 ton of gold into the industry, as provided by the Industrial Participation Programme, Anglo Gold and Gold Fields

Marketing support via EMIA and SSAS funding

Support for DME Precious Minerals legislation

Creation of industry capacity to promote a multitude of initiatives, as identified by studies

4.2.4.2 Project 2 of 2: Beneficiation Incentives

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265. The CSP recognises the importance of access to finance in building competitive and sustainable metal industries. Lack of R&D activity, technology and overall industry upgrades and the poor export performance of the downstream firms are directly linked to inadequate industry support these firms receive. Designing supply-side measures targeted at industry specific needs can resolve some of the technology chasm and skill shortage faced by the industry and improve the quality and standards of goods produced locally and thereby improve their marketability and export opportunities. There is also a need to make projects in the industry more attractive in order to attract foreign direct investments.

266. Market access is one of the key considerations that the CSP aims to facilitate given the

constraints encountered by industries (refer to market access discussions in chapter 2). To encourage growth of exports across metal industries, a cohesive export development and promotion support is required. The support can vary from simply providing information about current opportunities in the world market to giving specialised assistance to design and implement marketing programmes and sales campaigns abroad.

267. This project proposes that the dti investigate and evaluate a set of incentives specifically

designed to make manufacturing more attractive. It is proposed that all activities relating to manufacturing should be looked at. These should include:

Commercialisation of R&D support

Upgrading of manufacturing plant and equipment support

Infant industry support; protection

Re-location to SA support

Multi-shifting support

Environmental upgrading support

World-class manufacturing upgrading support

Cluster process support

Benchmarking support

Manufacturing start-up labour skills development support

Manufacturing market development support

Lower company tax rate for manufacturing industries

Working capital and pre-shipment finance

Strategic investment support

The goal

268. To create an investment friendly environment to encourage and attract downstream

beneficiation for investment in new capacity and upgrading of existing capacity along

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the value chain (this includes large capital-intensive processing firms and small, medium and large downstream manufacturing firms).


269. Lack of effective approach involving the incentive providers and users with regards to

identifying which of the activities (listed above) will have the highest impact on making projects attractive to investors, by achieving an Internal Rate of Return (IRR) for the project above the required hurdle rate.

270. Lack of awareness of available products.


271. Proposing, developing and implementing Downstream Beneficiation Support Program

(DBSP)

272. Create channels for communication to ensure that the amendment of the existing supply-

side supports and/or developments of new incentives are in line with industries’ requirements.

273. Targeted marketing of products to potential investors

Levers required

274. the dti and DST budgets to match incentive support required attracting targeted

investment level.

275. Financial support from National Treasury

276. Incentives Helpdesk

Resources required starting from zero base

277. The estimated project cost is R2.5 million over 5 years to cover development, evaluation

and marketing of proposals


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278. Inefficient and bureaucratic processes to be followed for the applications to be approved. the dti should ensure that these incentives are made accessible to all firms but particularly to small firms through reducing the cumbersome procedures that firms are currently facing to apply for existing support measures, often using consultants.

Implementing group and champion

279. Supported by the MSSIG, the dti will champion this project.

280. National Treasury to be involved in all stages

Expected outcome

281. A growing, competitive and sustainable metals industry both at the upstream and

downstream levels.

282. Increased investment and job creation.

Key performance indicators

283. Incentive products that target specific industry requirements.

284. Number of firms that are using the programmes.

285. Total investment generated and new jobs created.

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4.3 Strategic Theme C: Demands from Government’s Capital Expenditure and Major Private Sector Projects

286. Over the past two and a half decades, fixed investment by public corporations declined on

an ongoing basis, with their share of overall investment declining from 25% in 1980 to 10% by 2004. This adverse trend not only impacted negatively on the efficiency of service delivery by state owned enterprises (SOEs), but also contributed to the downscaling or even the demise of industrial activity in specific sectors of the domestic economy that supplied capital equipment, components and materials consumed by SOEs in their investment programmes.

287. The trend in SOE investment expenditure is set to be reversed in coming years,

particularly through the massive R134 billion capital expenditure programmes of Eskom and Transnet planned for the next five to seven years in South Africa’s energy and transport infrastructure, respectively. This will be the largest infrastructure development programme in many years and will provide a major stimulus for industrial development in the country. The importance of this capital expenditure (capex) becomes even more significant considering that total fixed investment in the country amounted to R226 billion in 2004, with public corporations contributing just over R24 billion to this amount in the same year.

288. Eskom’s infrastructure investment is aimed at increasing the utility’s generation capacity

by 5 300 megawatts to 41 500 megawatts. The objective is to re-commission mothballed power stations such as Camden, Komati and Grootvlei, whilst also creating new generation capacity and increased transmission capacity in many areas of the country, including Johannesburg, Bloemfontein, Richards Bay and the Cape Peninsula, as well as supply lines to Coega (Budget Review 2005).

289. Transnet’s capital expenditure programme is aimed at improving the quality and

efficiency of the country’s rail network, major ports and harbours. A substantial portion of this investment will be directed towards locomotives, wagons, signalling equipment and various types of cargo handling equipment (cranes, straddle carriers, etc.).

290. The investment plans of Eskom and Transnet are intended to address existing backlogs

and capacity constraints, whilst creating a solid foundation for increased private sector fixed investment to expand its productive capacity and thus enabling the South African economy to achieve a substantially higher and sustainable pace of economic growth over the medium to long term.

4.3.1 Key Strategic Challenge: Threat of Imports to Public and Private Capital

Expenditure Projects

291. The capital expenditure planned over the next five years in electricity generation and

transport (by Eskom the Independent Power Producer and Transnet) is estimated at R372bn. This compares with capital expenditure by all state owned enterprises (SOEs) in 2004 of R24bn. It represents a huge demand-side impact on the local economy. In

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addition, it is expected to crowd-in private investment as more efficient transport infrastructure lowers the cost of doing business in South Africa.

292. Over and above these SOE investments, major private sector projects are in the planning

stages, including possible projects in ferrochrome, stainless steel and aluminium. Major capital projects have a significant impact on demand for steel and metal products, as reflected in the input-output data assessed in chapter 2. The main challenge is to ensure domestic producers are able to meet the demand, and to use it to leverage growth in the metals industries more broadly. The opportunities can be summarised as:

Increased local output (and higher multiplier)

Significant job creation

BEE

4.3.2 Key Action Programme 4: Maximise Local Content through Backward Linkages

293. The proposed action is to set a database for major projects in order to predict capacity

and skills requirements and to initiate planning/cooperation actions to maximise local manufacturing potential. It is envisaged that this action programme can be a lever to unlock the potential of metals downstream industries and address the capacity constraints experienced by the industry at large.

The goal

294. Increase procurement of locally manufactured products into private and public

expenditure projects by 20%.


Advance planning to enable time for interventions

Credibility of government’s spending plans

Low private sector response

Lack of effective procurement procedures for both SOE and private projects

Lack of private sector involvement in the planning of capex

Limited domestic capacity

Economies of scale


295. Establishing a capex projects database

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Profile opportunities presented by the capex program

Plan required capacities

Advocacy in favour of “local sourcing”

Levers required

296. Coordination of DPE, SOEs, Merseta, IDC, the dti and private sector

297. Conditionality, local procurement, and BEE by SOEs

298. Build increased capacity and skills requirements into:

Financing by IDC

Merseta skills plans, and

the dti incentives

299. Planning of procurement programme to make local sourcing possible

300. Alignment of procurement policies that enhance domestic manufacturing


301. Initial plans and data gathering by DPE, IDC and other stakeholders indicating a positive

approach

302. Procurement review of SOEs


303. Project cost is estimated at R1 000 000 per annum covering design, population and

monitoring of the database


304. Delay in improving competitiveness means SOEs use imported metals inputs

305. Independent business/stakeholder cancelling projects without notice to the database

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306. Delay in finalising orders reduces the ability for domestic industry to set up and supply large quantities in a short space of time.


307. Supported by the MSSIG, DPE will champion this project

Expected outcome

308. Increased procurement of locally manufactured products

309. Planning of local capacity for anticipated demand

310. Indication of labour and training needs


311. Percentage increase in local procurement having an estimated target of 20%

4.4 Strategic Theme D: Global Competitiveness

312. In an increasingly global economy, the metals sector can anticipate growing international

trade as well as increased competition in materials, parts, products, services and labour. The industry’s performance is directly related to its competitive advantage, which is affected by many factors. Over time the relative influence of these factors can change. Some factors (e.g. metal prices and exchange rates) can vary over comparatively short cycles. Other factors such as ore reserves and firm level productivity may vary over longer time scales. Furthermore many factors that determine competitive advantage, such as international commodity prices, are beyond the influence of any one company or industry. However, a number of other factors (e.g. capital investment or technological innovation) are directly within their control.

313. Industries in the global economy earn their economic position through successful competition. Ultimately, the challenge for any firm is to maximize its performance with respect to the competitive factors that are directly under its control. The main challenge for government is to ensure the existence of a favourable business climate and a suitable infrastructure for companies and industries to develop and grow.

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314. It is now clear that whether an individual firm, an industry or a nation, increased beneficiation demands increasing competitiveness.

315. At company level, a beneficiation strategy based on increased competitiveness rests on two pillars: productivity and innovation.

316. Productivity is a measure of how efficient a company or industry is at adding value to its products or processes. Innovation is the capacity of a firm or industry to develop new products and processes, and to improve the productivity of labour or capital.

317. Ultimately the companies in the metal sector that prosper will be those that have the right combination of productivity and innovation to allow them to compete in the business climate. Conversely, the companies that struggle will be those that lack either the productivity or the innovation required to produce efficiently or to develop goods or services that have a distinct advantage because of unique qualities. High productivity and high level of innovation sometimes go hand in hand. These are critical factor that underlie a firm’s ability to add value to its products, process or services.

318. To achieve the vision of building international competitive metal products industries and adhere to the prerequisites of world-class manufacturing, issues relating to industry upgrading, technology, skills, export facilitation, facilitating import replacement need to be addressed. International experience shows that these issues can be resolved through clustering and collective agenda pursued by sub-industries concerned. A demonstration pilot of two initiatives have been identified to fulfilling these objectives. These are focused around strengthening the current trajectory of enhancing production capabilities; encourage advanced manufacturing and technologies; and building a competitive foundry industry.

4.4.1 The Strategic Challenge: Surge in the Importation of Manufactured Metal

Products

319. South Africa’s manufacturing industries are facing an increased challenge from imports especially due to the strong Rand and China’s emergence as a dominant manufacturing country. Presently all information processed by SARS under the Customs and Excise Act as part of the importation process is treated as confidential. This makes it difficult for industry to obtain details of specific imports, necessary to either fight imports or to assess local manufacture. A strong home base, built up on import replacement, has to be established before exporting can be considered. Import data is freely available in many countries such as US, India and Korea.

4.4.2 Key Action Programme 5: Establishing an Import Monitoring System

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The goal

320. Recover lost domestic market share and then increase exports by 12.5%14 per annum


321. The main obstacle is clause 4 in the Customs and Excise Act, which stipulates that any

importation information relating to any firm or business may not be disclosed to the public.

322. SARS will only change the clause if directed by the Parliament


323. Motivation of benefits derived from making this information available is required.

324. Facilitate the amendment of the Customs and Excise Act pertaining to the dissemination of detailed import data.

325. Creating and implementing Early Warning System (EWS) – Import intelligence gathering,

dumping investigation, profile import replacement and export opportunities

326. A pilot project is presently being conducted by the wire industry (SAWA)

Levers required

327. Economic justification is required of benefits derived from changing legislation.


328. This early warning system is also a finding of the recent FRIDGE report into employment in the Metals and Engineering Industry. Increased imports in many sectors have led to industry requesting this information. Discussions with SARS indicate that a sound case for changing the legislation will be needed.

14 Foreign trade at constant 2000 prices has increased threefold over the last twelve years. This amounts to a cumulative annual growth rate of 9.5%. The envisaged CSP interventions are estimated to increase this rate by an average of 30% per annum, thus increasing the growth rate to 12.5%.

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329. Project cost is estimated at R1 million per annum

330. Capacity is required to research the benefits of amending the legislation.


331. Possible legal actions when making customs data available


332. Supported by the MSSIG, SAWA will champion this project

Expected outcome

333. Increased local manufacture by replacing imports

334. A modest import replacement target of 2,5% will translate into 7500 new jobs in the metals manufacturing sectors.


335. Investments

336. Number of jobs created

4.4.3 The Strategic Challenge: Low Productivity and Innovation

(a) Improved production capabilities and benchmarking 337. SA downstream industries comprise of firms adopting different best practices that make

contributions to their production capabilities. However, not all the adopted practices are yielding the desired outcomes to build world-class downstream manufacturing industries. Some of the key factors impeding the improvements in production capabilities and capacities of the downstream industries relate to quality; skills; technology; inability to be innovative and lack of sufficient platforms to encourage

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information sharing. These factors have a major impact on the competitiveness of firms, ability to penetrate potential markets (both local and export markets), and ability to develop niche production processes and products. Other things held constant, they explain the differences in factor productivity between firms and their main competitors both locally and internationally. This suggests that firms have considerable scope of learning from each other and from global best practices. One method of learning is through benchmarking.

(b) Improved manufacturing and technological capabilities

338. Traditionally South Africa has a history of importing technology and improving where necessary, rather than developing from basic research. A significant focus on innovation is required in order competitive in downstream metal products industries.

339. R&D activity is at the forefront of creating an advanced manufacturing industry. In addition to R&D efforts, firms must have technological capabilities (up-to-date technologies and efficient production processes) to be able to become knowledge-intensive and world-class manufacturers. However, the levels of R&D and technological capabilities existing in the local firms are not sufficient to achieve the standards of the world-class manufacturing. These issues are addressed in the AMTS initiatives. The role of the CSP is to facilitate the effective implementation of these initiatives.

340. Light-metals: there is more innovative work done in the light metals sector, specifically aluminium, magnesium, titanium and the development of alloys. Downstream possibilities of these metals are large enough to warrant significant levels of research and development. However whether the downstream industries are able to apply the R&D undertaken remains a key challenge. This is due to the state of the technology in industries and lack of appropriate technical skills. The automotive industry has been an important stimulus for breakthroughs in upgrading technological capabilities and improved efficiencies for firms that supply into the industry. However, the potential for light-metals has not been fully explored due to a number of reasons. For example, the main problem with titanium is its high cost relative to aluminium and magnesium.

341. Most of the light-metal downstream opportunities have direct linkages to the foundry

industry. Therefore, we must deal with the constraints impeding the growth of foundries, which are discussed in chapter 2. The initiative to establish a NCTC is a mechanism to bring research, skills development and technology support closer to industry thereby enabling the industry to benefit from the light-metals opportunities.

342. Precious metals (gold and platinum): South Africa’s ability to compete internationally

remains in its comparative advantage, the endowment of natural resources such as gold and platinum. This document stresses the importance of beneficiation in order to take advantage of our resources thereby building a competitive advantage. In addition to factors raised under the key strategic challenge, the manufacturing capacity for converting precious metals into intermediates for industrial purposes and/or finished goods for final consumption is virtually non-existent. The price of gold and platinum is too high to enable firms to pursue manufacturing of precious metals.

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(c) Improved competitiveness and upgrading of the foundry industry 343. The weak performance of the foundry industry has had significant negative impacts on

the performance many sectors of the economy (e.g. automotive, machinery & equipment, etc). Foundries are generally the building blocks or the first stage in the beneficiation chain – problems in this sector have a negative spillover effects in the subsequent stages. A strong foundry industry is thus important for the broader based growth of manufacturing.

344. The SA foundry industry is characterised by:

Myriad of standards, which are perpetuated by SABS’s inability to assist industry in standards certification/verification

Low quality of castings due to insufficient testing facilities and inadequate technical expertise;

Inabilities to meet projects’ specifications and meet delivery times;

Lack of technology upgrades;

Aging skilled personnel; and

Very weak platform for information sharing to foster R&D and innovation.

345. While there have been new entrants into the industry, the size of the industry is not large enough to capture the expected growth in domestic demand (refer to chapter 2). It is clear that these constraints cannot be solved at the individual firm-level but need to be coordinated in a strategic manner that will yield greater benefits to the individual firms and the industry at large.

346. The SAIF, CSIR, AFSA, and other institutions, see the need for the development of a

collective action plan to address the shortfalls of the local foundry industry (i.e., technical and management skills capacity, effective dissemination of foundry technologies, effective collection and distribution of industry statistics, and other requirements of a non-competitive nature). Such a plan is complex in nature because of the range of different metals cast, foundry processes used, and markets with significantly differing requirements. Furthermore, such an action plan would require strong involvement by all role players, especially government. It is clear that, as the foundry industry is a key industry to further local beneficiation of metals and growth of the local manufacturing industry, there needs to be stronger initiatives from government in support of the industry.

347. The SAIF, CSIR, AFSA, the dti, NAACAM and other bodies propose the establishment of a

National Casting Technology Centre (NCTC), as a structure at national level that will be at the forefront of developing and implementing a national foundry action plan.

4.4.4 Key Action Programme 6: Upgrading Production Capabilities in Downstream

Industries

The goal

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348. Promote the culture of continuous improvement in selected metals downstream industries in order to remain globally competitive. To ultimately have world class metals downstream industries

(a) Benchmarking

349. Benchmarking is an important tool to foster continued upgrading by firms because it

enables firms to rate their performance against the competition and industry best practice and to identify where they are leading and lagging. It can also facilitate sharing of information by firms and the development of stronger inter-firm linkages. Production capabilities remains important to enabling firms to penetrate export markets. Therefore, any initiative geared towards facilitating exports should be directly linked to improving local production capabilities. The best practice and benchmarking tools embraces extensive critical competitiveness measures that can be grouped under six lean production market drivers:

Table 14. Market driver matrix Market drivers Operational performance measures

Cost control Total inventory levels

Raw material holding Work in progress Finished goods holding

Quality Customer return rates Internal reject rates Internal scrap rates Internal rework rates Return rates to suppliers

Value chain flexibility

Supplier lead times and reliability Customer lead time (time from an order to delivery) Delivery frequency to customers and delivery reliability

Operational flexibility

Manufacturing throughput times Production time lost to changeovers Production time lost to breakdowns Batch sizes

Human resource development

Preventative maintenance as a percentage of total maintenance time Training expenditure Formal off-line training per employee Suggestions received vs. suggestions implemented Labour and management turnover rates Absenteeism rates

Innovation capacity

R&D expenditure (process and product) Contribution of new products to sales

Source: Morris, M and Barnes, J (Mar, 2004); www.mindbranch.com/products

350. The proposed action is designed to give easy access to benchmarking, an important tool

for industry upgrading.

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351. The benchmarking tool can only be effective if firms are willing to share information.

Firms generally are not open about their way of doing business due to lack of trust, some industries are not large enough to secure information confidentiality. In addition, those who have never embarked on the benchmarking exercise are usually reluctant to contribute to the clubs, particularly in the first few rounds, as they are uncertain whether the exercise will yield the desired outcomes.


352. Establish a cluster programme for selected metal downstream industries to ensure that

stronger firm linkages and interactions are built.

353. Facilitate access of existing supply side incentives to supporting benchmark exercises and

associated actions in the downstream metals sector

354. The immediate intervention is to provide funding for the first few rounds of the benchmarking exercises to selected industries (that are key to capture demand growth opportunities discussed in chapter 2). This government-funded programme should gradually increase to public-private participation. In addition, government support should be made conditional on participation in benchmarking exercises, starting with priority industries. From the dti side, this can only be achieved if there is improved coordination with COTII institutions, e.g. IDC, to align their future lending and/or investments plans to vision of CSP.

355. Also, equally important, independent agents should be appointed to enable firms to share

information. Although methods used in formulating best practices are usually generic, it is vital for the appointed agents to have knowledge of the downstream industries.

Levers required

356. It is proposed that participation in approved benchmarking programmes in the future be

made a condition in the awarding of incentives. With the financial support being provided for benchmarking, this requirement amounts to firms providing the information necessary for benchmarking. This information will also provide a basis on which to evaluate the impact of incentive programme.

357. Funding support

the dti incentive schemes

IDC lending programmes

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Engage the services of an experienced benchmarking consultant

Sector Specific Assistance Scheme – targeted for funding of benchmarking

Agreed upon benchmarking model


358. Benchmarking is established in the motor industry and is being used for tool-makers,

lessons learnt can form these two industries can be applied to improving the success of the metal downstream industries.


359. Project cost is estimated at R10 million per annum


360. Supported by the MSSIG, AMTS will champion benchmarking exercises and cluster

support

Expected outcome

361. By implementing best practice, firms in the selected priority sub-sectors will increase

their sustainability, thereby improving their ability to grow and employ more people, as well as increasing profits. Exports will also become more competitive, and will increase. The overall economic benefit is to increase the GDP contribution of these sub-sectors and improve productivity gains as compared to competing countries.

Expected output

362. Selection of sub-sectors and number of firms per sub-sector to be formally enrolled on best practice programme

363. Appointment of the independent benchmarking agents

Key performance

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364. Targets linked with implementation of best practice per sub-sector:

Increased output, exports and productivity

Increased employment

Increased skills development and training

Total investment per sub-sector

Improved return on assets

(b) Improved manufacturing and technological capabilities 365. This programme looks at how the rollout of the AMTS, which covers all aspects of world-

class manufacturing, can be supported.


366. Lack of effective channels for commercialisation of R&D projects into the actual

manufacturing of products

367. Downstream industries’ readiness to implement the projects


368. Need for Industry networks and awareness programmes covering advanced

manufacturing technologies.

369. Platform for engagement between R&D organisations and industries to identify projects

and to leverage opportunities.

370. Need for industry upgrading to enhance the firms’ capabilities.

371. Incentivise the upgrading of equipment and processes.

372. Provide clustering support

373. Establish Manufacturing Awards

Levers required

374. Alignment of implementing agencies

375. Seed Funding from the dti and DST

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376. CSIR – Research capacity

377. DST – human resources within AMTS

378. DST’s incentives to increasing R&D


379. Current AMI initiatives include a Light Metals Development Centre (LMDC) and a Precious

Metals Development Centre (PMDC). The focus of the LMDC is on aluminium, magnesium and titanium, while the PMDC focuses on gold and platinum. These initiatives aim to stimulate and develop the respective industries in the areas of technical support, manufacturing excellence, industry development and human resource development. The LMDC is looking to promote the development of an internationally competitive downstream South African light-metals industry, particularly for automotive applications. The focus is on aluminium initially, expanding to magnesium and potentially titanium in the longer term. World Class Manufacturing Programme is been developed by AMTS.

Resources Required

380. Scoping of firm capabilities to assess the compatibility to existing R&D projects.

381. Project champion and facilitator.

382. Facilitate interaction between industry and institutions of learning.

Risks and Mitigating Measures

383. Industry feels that the performance of AMTS does not fully meet their requirements.

AMTS needs to gravitate towards implementation.

384. Flagship projects based on industry needs

385. Manufacturing rewards programme


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386. AMTS will champion this program with the support of the MSSIG

387. Research institutions

Expected outcomes

388. Upgrade of industries improving competitiveness.

389. Increased R&D expenditure to encourage innovation.

390. Growth in technical and manufacturing skills.

391. Increase exports of value-added products


392. Detailed analysis of firms’ capabilities

393. Implementation of industry upgrading programmes

394. Competitiveness Index Rating Improvement

(c) The National casting technology centre (NCTC) 395. The proposed action, therefore, is to support the development of the foundry industry,

which is a key to many industries, by supporting the establishment of the NCTC.

The National Casting Technology Centre

396. The NCTC will be driven by the needs of the local foundry industry and as such its governing body shall largely comprise individuals and institutes representing the industry. Core to its initial activities will be the aim of improving the competitiveness of the South African foundry industry, through the development of skills training, dissemination of foundry technologies, research and statistics on movements in the local and international foundry industry.

397. Although the NCTC will have a physical facility with equipment and core staff, it will act as the centre of a far larger network of organisations and facilities all of which will be able to offer critical competencies in some or various aspects of metal casting and related

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activities. The core functions of the centre will encompass (in order of current need and priority):

398. Casting Technology Training and Skills Development: It is proposed that the NCTC will have some equipment available to introduce trainees to the practical aspects of foundry operations. As it will incorporate the SAIF, it will also be able to offer localised and on site training programs aimed at the more practical applications of foundry knowledge and technology. The site will also be used to facilitate vocational training for university and early stage diploma students, as well as introduce and promote the industry to school learners. Some of the facilities, such as the vacuum furnaces available on site would be made available for postgraduate research and development. However, the NCTC will also actively encourage the country’s foundries and academic institutions to participate in foundry skills development programmes, which may not take place on the NCTC site.

399. SMME / BEE Development: Most of the operating foundries are SMME with very little BEE activity at present. The SMME foundries experience difficulties in accessing various funds and developing their own human capital. Key to the NCTC will be the development of programs that assist SMME's to become sustainable businesses with access to good quality skills development and training programs as well as the Skills Development funds.

400. Also, the NCTC would be in a good position to identify and further encourage and improve skills of the potential BEE individuals. The NCTC could utilise its network to assist these individuals to develop their businesses and enter beneficial contracts with larger companies that require their skills / services / products. Recognising that success of any SMME or BEE enterprise is reliant on the quality of skills within that enterprise it is essential that S A develops the skills while implementing a successful BEE / SMME business development strategy. The NCTC will be excellently positioned to develop and nurture excellent BEE talent in this regard.

401. Additional SMME / BEE projects will be developed and the NCTC will collaborate with the CSIR's EDC, GODISA and other relevant bodies and companies in order to implement these business development projects.

402. Foundry Support: It is envisaged that the NCTC will be able to act as a reference facility for those individuals and companies offering specialised consulting based services to the foundry industry. These would be largely referred activities, thereby supporting the network of existing and emerging service providers in the industry. Where necessary, the NCTC could provide assistance with the use of on site equipment in the following roles:

Product & process development (focussing on casting activities);

Trial production runs for new products and developments; and

Component and materials testing

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However, where there are already service providers engaged in commercial activities covering any consulting services, it would not be the role of the NCTC to engage in competitive behaviour and the NCTC should refer these activities out to one of the service providers.

403. Research and Development: It is envisaged that if the foundry industry can address it's immediate and pressing problems with regards skills development, technology implementation and SMME development, then it will at some stage require services that involve intensive R&D capabilities. It would be up to the NCTC to develop and promote these capabilities to the local industry. This R&D could be in the form of new casting technologies and processes, the development of new casting materials, or the development of new products to meet specified physical and design criteria. However, the NCTC would need to be guided by its members’ requirements in developing this aspect of its capabilities.


404. Funding to:

Secure the proposed site,

Repair and upgrade the building infrastructure, and

Consolidate the machinery and equipment.


405. Supporting the establishment and operation of a national casting technology centre

Levers required

406. the dti ‘s incentives programmes

407. DST – financial support through the AMTS, which advocates for the establishment of ‘technical centres and innovation centres’.

408. CSIR – make experts in casting technology available to NCTC


409. Business plan developed, industry reference group established.

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410. Initial presentations to industries to get buy-in

Resources required

411. Set up costs of R30 000 000 and operational budget of R7 million per annum

412. It is proposed:

Agreement to place Foundry development project on the dti – CSIR Bilateral to secure funding and resources required.


413. The NCTC process was initiated by the National Product Development Centre (NPDC) of the Manufacturing and Materials Technology Business Unit of towards the end of 2003 with the aim of utilising its foundry equipment. However, this has evolved over time to become a national government priority and not the CSIR project. It is important that this is understood by industries as efforts steered by national government to upgrade their production capabilities and improve their competitiveness.


414. Supported by the MSSIG, CSIR will champion this project

Expected outcome

415. The expected outcome of the NCTC is to provide comprehensive foundry support; create

a platform for innovation to enhance the current technological capabilities residing in the foundry industry; build a pool of skills that the industries can draw from; grow the industry by creating SMMEs opportunities. If a collective action around skills, technology and testing services yield appropriate measures to enable firms to upgrade capabilities, there is potential growth (for both local and export markets), improved competitiveness, and employment.


416. Secure funding from the government (the dti, DST)

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417. Establish facilities at CSIR

418. Make the facility operational. Once the NCTC is operational, there is a commitment from industry to support the NCTC through the donation of equipment.

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Chapter 5 Conclusions and Next Steps

419. Decisions made in the next five years will influence the long –term viability and future prospects of this sector. Over the past decade, the sector has gone trough some difficult times and has responded to many of the challenges it faced. Along with expanded trade has come greater competition. The pace of technological change is relentless. Human resources are under pressure. Traditional customer supplier arrangements are changing. Investments requirements are frequently high. Environmental concerns are ever –present and growing. There have been some notable successes, but the challenge to increase productivity and innovation has not diminished. Furthermore, it must be acknowledged that the economic contribution of this sector, with its diverse small and medium sized firms downstream, have tended not to receive the attention from government that is warranted by their high level of employment.

420. The time is now ripe for industry, government, labour and relevant stakeholder to launch this initiative that will help the sector exploit available opportunities in a sustainable way.

5.1 Summary: Key Strategic Themes for the Metals Sector

421. It is clear that the identified themes – leadership and co-ordination; beneficiation and

new investments; maximising expected government capex plans and major private sector investments; and creating a conducive environment that permits industries to achieve global competitiveness – are closely interrelated. The CSP, through these strategic themes, recognises the importance of upgrading the industries – in terms of skills development; technology; innovation; and entrepreneurship – in order to achieve high levels of competitiveness to make a meaningful contribution towards employment, investments, equity and extend the presence of the domestic metals industries in global markets.

422. the dti recognises that SA continues to be a net importer of value added products although it is an exporter of primary metals production (including aluminium, carbon and stainless steel). Currently, it is difficult to measure the impact of these imports on the growth potential (output and employment) of different downstream industries due to lack of quantification of actual volumes imported. This is limited by the fact that local databases tend to aggregate products into large categories – assessing imports by specific product groupings at the disaggregated level is very complex.

423. Scientific analysis of imports and the management reporting thereof is of utmost importance to any industry if we want, at policy level, to explore the possibilities of import replacement. It is therefore, important that import information in the sub-downstream industries be:

Centralised (cost saving)

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Expanded (to include relevant statistics such as future drivers of potential imports such as exchange rates, imports of value added products – which is not easily identified in terms of HS-codes, etc.)

424. In this regard, the dti commits to investigate steps required to make presently

confidential SARS data relating to import accessible to interested industry parties. The need for the information has been identified as necessary as an early warning system for imports and to identify products for local manufacture. It is envisaged that an up-to-date database of imported value added goods that will inform policymakers and industry stakeholders about the possibilities of import replacement opportunities, which can potentially increase the value added to local primary production and create employment opportunities.

425. It is comprehensible that at the forefront of this strategy is commitment to building and improving the competitiveness of metals downstream industries. However, the CSP acknowledges that SA needs to continue to encourage investments in upstream industries to build on its resource-based advantages. The strategy also recognises that metals upstream remains very attractive in terms of attracting FDI and will continue to receive government support. In this regard, the CSP aims to play a facilitative role to prevent upstream firms from abusing their positions and thus ensure that upstream investments are not being promoted at the expense of downstream production; and will only be supported if the cost-benefit analysis demonstrates clear overall gains to the local economy.

5.2 Strategy Deliverables

426. Successful implementation of a strategy of this nature will deliver:

A focused shift from the upstream industries to labour intensive downstream

industries. This will require leveraging the existing upstream capabilities to increase downstream production and improve capacity utilisation. It is envisaged that to accelerate the competitiveness of downstream industries, government efforts should be complemented by appropriate support in critical areas such as skills development & training; technology improvements; and industry upgrading. This will lead to sustainable job creation and expansion of globally competitive industries.

Increased broad-based BEE participation – this can be realised through increased participation of SMMEs; provision of accredited training programmes; and investment opportunities aimed at increasing beneficiation.

Co-ordinated interventions aimed at maximising the benefits of domestic demand in favour of the local industry – for most of the downstream companies in metals sector, even those with a strong export focus, domestic demand continues to be an important driver of growth and in some cases, dominant driver of employment. Therefore, implementing measures that warrant the expected growth in local demand to accrue to local companies is vital for future growth of the sector.

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427. Owing to the strict discipline of the CSP methodology, there are a number of areas that have not been concentrated on sufficiently in this strategy and are recognised as key issues that need to be resolved in the next iteration. These are: Competition Policy, customs Control, Geographic Spread, Market Access, Product / Market Development, standards and Certification, and Trade Barriers.

430. This document begins to develop a strategic response to the substantive challenges faced by the metals industries. However, given the fragmentation of the metals downstream industries, there is a need to examine the whole value matrix of the sector in order thoroughly understand obstacles and opportunities prevalent along the value chains. Given this urgent requirement, the CSP document outlines four key strategic themes, at a high-level, that can create a platform for growth and increase competitiveness.

5.3 Factors Influencing Successful Delivery

431. Successful delivery of this strategy requires:

Strong leadership – which is going to be able to drive the work of the CSP

forward. The core function of this leadership will be focused on building a globally competitive; employment generating; foreign exchange earning; broad-based Black empowering; and investment attracting metals sector that attracts investments along the value chains.

This leadership should also ensure that the expected growth in domestic demand is fully captured by the local industries and induce greater economic spin-offs. In the process of facilitating these benefits from local demand, the importance of export promotion and market access cannot be overlooked.

To have a focused leadership, it will require government; business; and labour leaders to take ownership and drive implementation of this strategy towards success no matter what barriers exist. This is going to require leadership and commitment from the most senior levels of all key stakeholders within the sector who are in a position to influence change. Leadership will need to create alignment across the spheres of government, key players in business and other stakeholders such as the SOEs, trade unions and communities.

Outcome and output-based key performance indicators are critical and need to be used as the basis on which progress is judged. Without such a scoreboard, the vision cannot be managed, it would not be surprising that a lot of projects would take place which cannot be assessed as to whether the right choices are being made, the right actions are taking place and the right outcomes are being achieved. Baseline information for the measurement of key performance indicators is not readily available, and has to be determined as part of the project to revive the “Sectoral Prospects”.

Key action programmes need to be well-resourced, and communicated in a meaningful way and a marketing function must support these programmes, both to communicate within the partnership as well as to communicate with other stakeholders such as academic institutions. “Sectoral Prospects” is going to become the critical centre piece upon which strategies are going to be built and decisions are going to be taken.

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Total budget support is estimated to be R172.5 million over 5 years to implement the KAPs as outlined in this CSP document.

5.4 Next Steps

432. The Metals CSP unit aims to make this strategy as all-inclusive as possible through

engaging and consulting with all social partners and key stakeholders. Where policies range across Government, the dti will ensure close liaison with other departments to champion sector interests. Critical to the CSP work and programmes to be taken forward, is that this document must be approved by EXBO. As next steps we will:

Work with a South African university (SAU) to develop and deliver a customised

training programme for existing and new CSP officials by conducting an exacting needs assessment with the dti to uncover issues and challenges, and ensure that a customised training programme that is developed tackles most vital concerns. The assessment actually should be part of the education process, involving and garnering buy-in from senior leaders as the process unfolds. SAU must then:

Work with the dti to design a customised training programme that meets CSP's needs.

Develop the curriculum and learning materials based on the economic aspirations that have been outlined.

Assure the dti of ongoing collaboration, and a commitment to service and flexibility to ensure that the program creates a high-impact learning experience for participants and leads to the outcomes the dti desires.

Revive and publish the web based ‘Sectoral Prospects’, which was a joint effort of modelling, research work, and qualitative inputs by the IDC’s Economics Department in conjunction with the different sector directorates of the dti. This was the only document of its kind in South Africa that provided a five-year outlook of the South African economy and included:

An overview of the structural dynamics evident when comparing a ‘realistic’ macro-economic scenario with a more ‘optimistic’ scenario;

An article which commented on the sector performances required by a more ‘optimistic’, high scenario;

For eighty odd industries (sub-sectors), an indication of growth performance over the past six years, a profile of recent sales, costs, international trade, import tariffs, sectoral analyses of threats and opportunities for debate on future actions and market access, and a qualitative assessment of its demand and supply side driving forces; and

Forecasts on production, employment, exports, imports, sales and investment for the period 1997 – 2001.

During the Metals and Engineering sector summit process in April 2005, constituencies identified and discussed proposals for possible stakeholder

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agreements in areas such as the trade regime; preferential procurement in respect of local content; skills development in the metals and engineering industry in respect of both production workers and management; issues relating to raw material inputs; assistance for SMMEs in the metal industries as well as improvement in supply-side measures.

Hold the Metals and Engineering sector summit before the end of 2006 and operationalise the proposed action programmes. The summit objectives are to:

Develop a strategic approach to achieving a sustainable growth trajectory that will maximise employment creation, investment and downstream industries development;

Unite Business, Labour and Government around the outcomes of the metals sector process and to align programmes and activities within each constituency towards support of the outcomes of this process;

Develop an institutional approach, which will ensure ongoing engagement and implementation of the agreements reached.

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ANNEX 1

Government websites

Copies of this publication can be downloaded from the dti’s website. All Spheres of Government www.gov.za

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ANNEX 2

Bibliography

Websites Aluminium Federation of South Africa: www.afsa.co.za Council for Sciences and Industrial Research: www.csir.co.za South Africa Stainless Steel Development Association: www.sassda.co.za South African Iron and Steel Institute: www.saisi.co.za South African Tank Containers Association: www.satca.co.za South African Tooling Industry Support Initiative: www.satisi.co.za www.engineeringnews.co.za www.tips.org.za Studies Bertrand, D, Phele, T, Roberts, S, Steuart, I, Taka, M (2004) ‘Western Cape Report on: Metals & Engineering Industries, Including Ship-building’, report commissioned by the Western Cape Provincial Government CSID (November, 2004) ‘A Strategic Review of the Metals Industries: Performance and Prospects’ CSIR/the dti (July, 2004) ‘Foundry Technology Roadmap’ CSIR (November, 2003) ‘Analysis of the Metals & Engineering Services Sub-Sector of the Manufacturing Sector in the Western Cape Province’ Fund for Research into Industrial Development Growth and Equity, FRIDGE, (2003) ‘Study to Facilitate the Formulation of an Integrated Strategy for the Retention and Creation of Employment in the South African Metals and Engineering Sector’ Hawthorne, R and Saggers, G (April, 2005) ‘Evidence and Implications of Import-Parity Pricing in the Aluminium Industry in South Africa’, Corporate Strategy and Industrial Development research programme Kaiser Associates (February, 2005) ‘South African Diamond Value-Addition Project - Intervention Options and Strategic Recommendations’, FRIDGE Study Machaka and Roberts (2004) ‘Addressing the apartheid industrial legacy: local economic development and industrial policy in South Africa – the case of Ekurhuleni’, paper presented at Wits-Ekurhuleni Symposium on Sustainable Manufacturing 10&11 June 2004 Mahanjana, B and Roberts, S (May, 2005) ‘Import Parity Pricing in Stainless Steel’, Corporate Strategy and Industrial Development research programme Masethe, R and Roberts, S (2003) ‘The Metal Products Sector in Ekurhuleni’, Ekurhuleni Briefing Paper 4, Corporate Strategy and Industrial Development research programme Morris, M and Barnes, J (March, 2004) ‘Policy Lessons In Organising Cooperation and Facilitating Networked Learning in Value Chains and Industrial Clusters’

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Phele, T, Roberts, S and Steuart, I (July, 2004) ‘Technology, Skills Development, and Institutional Constraints in the South African Foundry Industry: Policy Recommendations for Improving Competitiveness in Casting’, Corporate Strategy and Industrial Development research programme Roberts, S (March, 2004) ‘The Impact of Import Parity Pricing in the Metals Sectors on Downstream Producers: The Case of Basic Iron and Steel’ Briefing Paper Presentations (February, 2003) ‘The Case for a South African Magnesium Industry’ BHP Billiton (September, 2001) ‘Wheel Industry Analysis’ Fusi, M.P. (April, 2005) ‘Mining Charter Critical Lever for Unlocking SA Minerals Beneficiation Potential’, Mintek Presentation Kaiser Associates (July, 2001) ‘Transformation of the Jewellery Industry’, Based on the Findings from South African Jewellery Cluster Study LHA Management Consultants, (February, 2005) ‘Apparent Consumption Stainless Steel in South Africa’ the dti, (May, 2003) ‘BWS Investment Stainless Steel Precision Strip Mill’ the dti, (September, 2004) ‘CSP – Metals’ Other Publications Business Plan for Base Metals Technology Business Centre Business Plan for the National Casting Technology Centre CSIR-NACI, (2002) ‘Advanced Manufacturing And Logistics Technology Strategy’ De Villiers, C, (January 2005) ‘Summary of the Recommendations Presented to SAWA on Behalf of the WWP Working Group’ DME (2002) ‘Mining Charter and Scorecards’ DME (2003/2004) ‘South Africa’s mineral industry’, 21st Edition DST (2003) ‘National Advanced Manufacturing Technology Strategy for South Africa’ Modern Casting, (December, 2004) ‘38th Census of World Casting Production – 2003’ NEDLAC (2003), Growth and Development Summit Agreement SA Cabinet (2002), ‘Micro-Economic Reform Strategy’ SAISI (March, 2005) ‘Steelnews’ Issue 28 the dti, (2004) ‘Broad Based BEE Strategy’ the dti, (2002) ‘Integrated Manufacturing Strategy’ the dti, (May, 2005) ‘Minister’s Brief on Scrap Exports’ the dti, ‘CSP – Stainless Steel Industry Sub-Sector’ the dti, ‘Stainless Steel CSP Project Definition and Outline’

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