Starting from scrap – Angola launches steel industry

Left to rust in open fields and disused barracks, Angola’s stock of decommissioned weapons stand as a stark reminder of the bloody civil war that gripped the country for 27 years.

Thirteen years after a peace deal that still holds, a new $300m plant is beginning the task of converting the deadly armaments into rebar steel for use in Angola’s gleaming new developments. 

Yet the plant’s innovative use of war scrap is intended as more than a symbol of the country’s enduring peace, and is at the heart of an ambitious plan to capture a domestic and regional export market amid the turbulent backdrop of a global steel industry in crisis.

“We must use the resources to create value-added products and be able to export. The main focus is to be able to supply (Angola’s) own market. This mill has come at the right time,” says Georges Choucair, chairman and chief executive of K2L Capital, owner of ADA Steel. That sort of confidence is rare in an industry which has lurched from crisis to crisis in recent years. China’s economic woes and a wider global slowdown have prompted a dearth in demand for the metal as major construction projects are delayed or cancelled.

Global steel production in the first eight months of 2015 was down 1.4% on the same period in the previous year, according to metals consultancy FastMarkets. Meanwhile, China, the world’s major exporter, has proved reluctant to end a global glut by turning off mills which provide local government with much-needed revenue and employment. 

All of which points to an environment hardly conducive to the opening of a new mill in an African continent struggling with its own growth prospects. Yet Choucair points to a raft of advantages that he says will help ADA’s mill succeed in a difficult environment. 

“We have something that Europe doesn’t have, that’s a low cost of energy and a low cost of scrap, and plenty of it. So we have advantages to produce steel in Angola and not to import. Our studies show that we will be competitive against importation,” he says.

Those plentiful reserves of scrap – which include weapons, disused rail infrastructure and materials from the country’s vast oil industry – could last three years. Two years from now, ADA hopes to begin producing steel from local sources of iron ore.

Choucair says that the firm will target a promising regional export market, with DR Congo, Congo-Brazzaville and Zambia all within reaching distance of Angola and expected to require vast amounts of steel as their economies develop.

John Kovacs, senior commodities economist at Capital Economics, says that the fundamentals of Africa’s development appear to support the emergence of domestic production.

“Africa as a whole accounts for only a small proportion of global steel demand – just 2.4%. There is scope for this proportion to increase as industrialisation takes hold, with the steel intensive investment that would require. At the same time, Africa accounts for just 1% of global production,” he says.

Yet he cautions that short-term factors, in particular global overcapacity, make this emergence far less likely in the short term. That market glut, and the consequent demise of steel mills from northeast England to South Africa, have been blamed squarely on the phenomenon of Chinese dumping. Even as prices slump, China is expected to have exported over 100m tonnes of steel this year.

This dumping has been likened to a game of “whack-a-mole”, in which Chinese exporters avoid regions where anti-dumping measures are threatened in favour of targeting poorly protected markets.
Kovacs argues that this makes some African countries vulnerable.

‘Bloodbath year‘

Nowhere have the effects been more keenly felt that in South Africa, where Paul O’Flaherty, local chief executive of Indian giant ArcelorMittal, has warned of a “bloodbath year”, and called for anti-dumping duties of as much as 30-60% on certain Chinese steel products.

The Steel and Engineering Industries Federation of South Africa has pointed to a 2% decline in metals
and engineering production for the 12 months to September, with chief economist Henk Langenhoven warning of tough days ahead and arguing that a real recovery might not materialise until the second half of 2016.

For Choucair, South Africa’s woes are more a symptom of local factors than a definitive judgement on Southern Africa’s steel industry.

“Today they face a problem with their workers, and also a problem with energy. So they have their own problems and South Africa never was competitive in the Angolan market, it was always cheaper to import from Europe,” he says.

Choucair argues that Angola’s import strategy, prompted by a bid to diversify its economy and develop domestic industries, provides a contrast to the struggling South African market. Incentives for businesses have been ramped up in a bid to attract foreign investment.

He says that Angola’s adoption of European standards for construction – demanded by international oil companies and banks for their projects in the country – gives his mill an important weapon in the fight against the dumping of inferior Chinese steel. Quality, not quantity, is the new mantra.

As a result, he predicts that future competition to the mill is more likely to emerge within Angola itself.

“We are working with the Angolan government to implement these standards. As you know, the Chinese have a very different quality of steel. By using quality, and focusing on standards, we can throw away a lot of the steel that is coming from China,” he argues.

Whether the new mill will be able to succeed in a market which continues to trouble established competitors remains to be seen. But with a production target of 1-1.5m tonnes per year by 2018/19, the firm appears to be planning for the long run.

“Today we have a high-voltage line, water, and we have created 600 direct jobs. Today we are here because we made that investment. Two years ago you would say I am foolish,” he jokes.

David Thomas