Strong as steel: The growing metals segment seeks to capitalise on regional markets

The domestic construction boom offers big rewards for steel producers. Residential and industrial developments are consuming supplies of steel products, from rebar and nails to wire netting and corrugated roofing. Despite the enormous potential, the same challenges confronting local industries across the board are also undermining local steel producers. Meanwhile, international steel firms eager to access a growing market are flooding Ghana with imports. The expanding demand and increased competition have spelt trouble for outdated firms, while offering new opportunities to robust local producers.

RISING DEMAND: Ghana’s demand for iron rod has tripled in recent years, Yasser Aschkar, the managing director of Wire Weaving Industries (Ghana), told OBG. The market for steel is segmented between small-scale residential uses and commercial or industrial uses. Local steel firms produce cold-rolled steel, a lower-quality and cheaper product, used mostly by Ghana’s contractors to build unregulated buildings and homes. For construction of high rises or standardised housing projects, contractors use more costly hot-rolled steel, as approved by the Ghana Standards Authority. Hot-rolled steel is almost entirely imported. However, that may change as United Steel, a local producer since 2006, plans to manufacturer hot-rolled steel in Tema starting in 2014.

COMPELLING MARKET: With markets in more developed economies stagnating, global steel producers are turning to Africa for continued growth. “The booming BRICS [Brazil, Russia, India, China and South Africa] have their own steel production,” Tony Sethi, the managing director of Steelco Ghana, told OBG. “Demand for steel is reduced in the US and EU. Africa is one of the only markets left.”

Accra’s rising skyscrapers and malls are largely built with imported steel. Local mills have not been able to produce to the required standards, Sethi told OBG, and imports are needed to meet short-term demand. During a visit to Ghana from a delegation of 21 Turkish producers in 2012, for example, Turkey’s Steel Exporters’ Association said that its steel exports to the country increased some 125% in the first four months of 2012, year-on-year.

Industrial demand is also largely met by foreign steel. None of the steel products used in the oil and gas industry are manufactured locally, a local oil services provider told OBG. Steelco Ghana uses imported steel for its wire rod-processing facility to produce nails of various types, binding wire, concrete reinforcing mesh and cold-drawn reinforcing bars at its Tema factory. Wire Weaving Industries (Ghana) imports galvanised steel for barbed wire, welded mesh and other metal products, as local firms cannot produce the necessary film coating.

LOCAL PRODUCERS: Given the increasing demand and rising competition seen in Ghana’s steel market, the performance of domestic producers ranges from poor to promising. The mixed outlook is reflected in local press reports, which have run with headlines ranging from “Imports Killing Steel Industry” to “Two New Steel Firms Start”.

The up-and-comers are the new entrant Rider Steel and the expanding United Steel, with respective capacities of 5000 and 25,000 tonnes. With new investments, the firms employ more advanced technology than Ghana’s established steel companies.

“The old are dying out,” Sethi told OBG. “But the newer firms can still survive with the higher electricity costs and without ‘anti-dumping’ measures.”

The five established players include two Chinese firms, Sentuo Steel and Ferro Fabrik; two wholly owned Ghanaian firms, Special Steels and Western Casings; and 100%-India-owned Tema Steel. Steel companies in Ghana had a total capacity of approximately 600,000 tonnes annually as of 2013.

Ghana’s veteran steel producers seem beset by one challenge after the next. Issues with securing a reliable power supply are particularly trying for an industry that requires sustained high heat. Furthermore, the Public Utilities Regulatory Commission proposed a price increase for power in June 2013. When the tariffs were last raised in 2010, the executive director of Special Steel said the rate adjustment increased the cost of production by 60%.

SCRAP METAL: Another industry challenge was recently corrected when the government enacted a ban on the export of scrap metal. A key input in local steel production, ferrous scrap had become somewhat scarce in Ghana as dealers found higher prices on international markets. Previously, the steel producers had benefitted from artificially low input prices in the closed market, but for over a decade dealers have exported the scrap to other West African countries and increasingly to Asia. Scarcity hit crisis levels in the middle of 2012, and the five established firms were facing shutdowns, local media reported. In mid-2013 the government added teeth to an existing administrative ban on the export of ferrous scrap metal and the price dropped from GHS620 ($318.74) to GHS400 ($205.64) per tonne, according to local media. “The governmental export ban on scrap has significantly improved local scrap supply conditions,” said Abdul Majeed Mikati, the managing director of United Steel.

However, members of the Scrap Dealers Association of Ghana said there is not enough local demand for the country’s scrap supply and the ban had put their livelihoods at risk, local news sources reported. The association has called on the government to revise the ban, allowing firms to export steel balls, ductile steel and manganese, which the dealers said local producers do not have the capacity to melt.

CHEAP IMPORTS: Many steel manufacturers complain about competition from cheaper illegal imports, and in early 2013, Ferro Fabrik, Tema Steel and Western Steel all shut their doors and sent home at least 3000 workers for a matter of months. According to the Ghanaian Chronicle, steel coils are imported illegally at the 5% duty rate applied to raw material imports, rather than at the 20% duty applied to finished goods. The coils are transformed into steel rods in a low-value-added process the paper claimed does not qualify as manufacturing. Not only do these cold-rolled imports avoid the duty, but also they compete directly for the non-organised construction market served by Ghanaian producers.

STORIES OF SUCCESS: Not all of Ghana’s steel companies are struggling. Special Steel plans to double capacity at its Tema plant, local media reported in June 2013, and Lebanese-owned United Steel is investing $100m in Ghana. With a capacity of 350,000 tonnes, United Steel’s new plant will be West Africa’s largest steel factory, Mikati told OBG.

Most ambitious of all, United Steel is planning to manufacture hot-rolled steel from billets and scrap for use in the booming commercial building sector. If the venture proves successful, United Steel would be the first local producer to compete in the organised construction market. Convincing industrial and commercial firms to buy Ghanaian rebar may be difficult, Sethi told OBG. However, a local producer could sell its output at a discount to imported rebar, which is taxed at 20%. “Locally produced high-quality rebar for larger-scale projects will be around 10% cheaper than imported rebar, which will reduce construction costs,” Mikati said.

ECOWAS MARKETS: Like the country’s other manufacturers, Ghana’s steel and steel products producers aim to tap growing regional markets, but as in other sectors, a number of obstacles make exporting to ECOWAS countries costly. Some steel manufacturers currently sell to neighbouring countries, but buyers purchase directly from factories, which can allow firms to avoid the ECOWAS transport challenges. Mikati expects United Steel to export 40-50% of the production from its new factory.

Wire Weaving Industries (Ghana) exports locally made products to Nigeria and Burkina Faso, but given the current logistical hurdles it would actually be more cost-effective to send goods from Europe to Ghana’s neighbours, said Aschkar. While exporters are entitled to a duty drawback from the Ghanaian government, the paperwork and associated red tape can delay payments by more than two years, rendering the reward largely meaningless.

If the barriers to trade with ECOWAS countries were removed, Aschkar believes Ghana would be well situated to serve as a hub for the region. “Manufacturers have to deal with documentation issues when exporting to other ECOWAS countries. If those obstacles can be resolved, Ghana would become a lot more export-oriented, resulting in a wider range of opportunities for local producers,” Aschkar told OBG. With continued power shortages, regional transport obstacles and competition from imports, Ghana’s local steel producers face numerous challenges. If United Steel can convince buyers to purchase locally made quality steel, it would be a good sign for industry efforts to move up the value chain and benefit from a wealth of growth opportunities.