South Africa agrees steel plant study project with China

Out-Law News | 12 Sep 2014 | 3:10 pm | 2 min. read

South Africa’s Industrial Development Corporation (IDC) has signed an agreement with China’s Hebei Iron & Steel Group (HISG) aimed at building a steel manufacturing plant in South Africa with a total production capacity of five million tonnes.

The IDC said it signed a memorandum of understanding in Beijing on 11 September to conduct a joint detailed feasibility study “for a greenfield steel plant”.

The IDC, the South African government-owned national development finance institution set up to promote economic growth and industrial development, said the agreement follows its completion of a pre-feasibility study for “a new low-cost iron and steel facility, based on available low-cost resources in South Africa”.

If construction goes ahead the first phase of the project, with a three million tonnes capacity, is estimated to cost $2.7 billion, the IDC said. The second phase, providing for an additional two million tonnes capacity, would cost around $1.8bn.

South Africa’s economic development minister Ebrahim Patel said: “We need to increase the level of competition among local producers of steel, to help lower the prices of this critical input into industrialisation and avoid monopoly pricing. This agreement is a first step to look at the feasibility of a steel project that the IDC is working on.”

Patel said that the project, if successful, “can help to expand capacity, process local minerals in South Africa, support sustained economic growth, job creation and youth employment”. He said local industry “needs competitively priced inputs”.

IDC chief executive officer Geoffrey Qhena said that, earlier this year, IDC acquired the Palabora Mining Company in South Africa together with a Chinese consortium led by HBIS and three other groups including the China Africa Development Fund (CAD), which promotes Chinese investment on the continent. This formed the basis for increased cooperation, Qhena said.

Qhena said subject to a “positive outcome” of the feasibility study with HBIS, “we intend to commence with the establishment of the South African iron and steel company”.

Qhena said South Africa offers access to “competitively-priced raw material input and good infrastructure within a rapidly growing region”. He said: “We expect this project to benefit from the projected market growth. The facility will meet world-class operational, environmental and safety standards while meeting the financial returns expected by the shareholders.”

According to Qhena: “Growth in South Africa's downstream steel processing and fabrication industry is currently constrained by uncompetitive steel prices and the unavailability of certain steel products. The downstream steel processing sector is highly labour-intensive and thus has the capacity to create significant jobs. It is our view that an efficient steel-making facility is capable of supplying steel at competitive prices to stimulate growth in the downstream steel sector.”

The IDC said HBIS “brings to the table expertise and a proven ability to operate steel-making facilities”, which can be coupled with IDC’s knowledge of the local and regional operating environment. The CAD is expected to provide financial support if the project goes ahead, the IDC said.

IDC said HBIS is a large, state-owned iron and steel group company established by China’s Hebei provincial government. “Its principal business is the production of iron and steel and it has interests in natural resources, manufacturing, finance and logistics,” the IDC said.

According to the IDC, the demand for iron and steel in South Africa and surrounding markets is growing, “creating huge potential for the development the industry”. In addition, the continent is “showing good growth potential, driven by investment in infrastructure, energy, mining and construction, all of which is expected to drive steel demand in the medium to long-term”.

The ‘World Investment Report 2013’, published by the UN Conference on Trade and Development (UNCTAD) (264-page / 2.18MB PDF), said Chinese foreign direct investment (FDI) stock in Africa at the end of 2011 stood at $16bn.

South Africa was the leading recipient of Chinese FDI, according to UNCTAD. South Africa itself was the fifth largest holder of FDI stock ($18bn) on the continent in 2011 and the second largest developing country investor globally after Malaysia.