Raising local capacity in metals production and export

With a history that stretches back to the days of independence when Valco Aluminium – at the time Africa’s largest smelter – Ghana’s metals industry has faced significant challenges recently, although it has benefitted from growth the rest of the country is enjoying. Reliant in past years on domestic demand from the extractive sectors, the bulk of the momentum has more recently come from the construction market that has seen its value increase by 26% between 2011 and 2013. New investments involving more advanced technologies are pouring in that should position local industry to better compete on both price and quality. In addition, due to tightened regulations on certain metal exports and imports, local producers should be assured of a more stable supply of key input materials moving forward.

Steel

Ghana’s installed steel making potential stood at around 70,000 metric tonnes (MT) per year in mid-2013. Market participants include Sentuo, a joint venture between the Fujian Chinese Overseas Industrial Group and the Ghanaian government’s Social Security and National Insurance Trust with capacity of 25,000 MT. This is joined by Indian-owned Tema Steel, with 4500 MT capacity, and China’s Ferro Fabric with 4000 MT, while two Ghanaian firms – Special Steels (3500 MT) and Western Castings (2000 MT) – round out the field.

Additional capacity is due to arrive with a number of announcements for new plants in recent years, including from the United Steel Company. The Lebanese firm is constructing a $100m, 25,000-MT facility that will be located in Tema with operations tapped to begin in 2014. The plant will produce high tensile rebar, which is used in large-scale infrastructure projects and high-rise buildings. According to the company, the rebar will come out to be 10% less expensive than what prospective customers are currently paying for imported equivalents. Jordan’s Rider Steel, meanwhile, will also establish production in Tema, with initial expected output of 5000 MT.

Grup Armangué, a Spanish consortium that manufactures steel for concrete reinforcement, is set to build a $10m factory in partnership with local Eco Technologies & Community Infrastructural Group Ghana to produce pre-fabricated steel products. Work on the factory is set to begin in 2015. South Africa’s SCAW Metals Group broke ground on the construction of a $40m grinding media plant, the output of which the group has stated should directly substitute the steel products currently being supplied to its Ghana-based mining customers through imports from its South African plants. The project marks the first manufacturing site for the company in West Africa and is being established as a 70:30 joint venture with local company Jospong Group.

Inputs

One factor supporting greater demand for domestically sourced construction material over imports is a depreciating currency, which makes local steel more affordable for contractors. It also impacts the cost of inputs for steel producers, who generally acquire material abroad. “You cannot expect demand for local products to increase when the local manufacturers are having to import raw materials, packaging and production equipment in either dollars, euros or rands, and are having to repay this foreign currency at a depreciated exchange rate,” Pieter Swanepoel, the financial manager for West Africa at BSI Steel, told OBG.

It is estimated that, collectively, local steel mills rely on 80,000 MT of ferrous scrap metal each month, whereas the local supply base for the raw material is only able to generate around half of that demand. Many plants, however, are said to be running at around 30% capacity due to the practice of locally produced ferrous being sold to export markets where it can fetch higher prices. By identifying steel as a strategic industry, the government has intervened by banning the export of ferrous scrap metal outright, joining a number of other countries in the region that passed similar protective legislation.

Import Restrictions

The sector is a competitive one, with producers also needing to compete against imports. With developed markets only showing a slight rebound from the global financial crisis and emerging markets in Asia and Latin America possessing sufficient and even excess supply of their own, major steel and other heavy metal producers have been turning to Africa to sell off their surplus output – often at a cheaper price and higher quality than what can be produced locally. “International entities require certified steel that is mostly only available through importation,” Swanepoel said.

Local producers are also calling for greater controls over steel related products entering the country, in particular steel coils that they claim are being fraudulently imported to avoid paying full duties. Under the Customs regime, most finished goods arriving into the country are charged a duty of 20%, while raw materials have a much lower duty of 5%. Local steel manufacturers argue that steel coils should be treated as finished goods and not raw materials as they are converted into steel rods through an extremely low-value-added process.

Aluminium

Aluminium is Ghana’s largest metal industry – particularly as steel is facing a mixed outlook of growing demand and low-cost imports – and has also seen a boost from the uptick in headline growth. “With new housing and road construction, the demand for aluminium in West Africa is strong. However, local suppliers need additional support if they are to compete with subsidised exports from Asia,” Kwasi Okoh, managing director of Aluworks, a continuous casting and cold rolling mill, told OBG.

With deposits estimated at around 700m tonnes, Ghana boasts the third-largest bauxite reserves in Africa, according to its Chamber of Mines. Most of what is extracted is being exported, however, due to gaps in terms of bauxite refining. However, in 2013 the local press reported that domestic companies were expressing more interest in adding value to the country’s bauxite industry, as it is estimated that over $350bn in revenue could be lost if a refinery is not constructed in the country and the value chain is not integrated. “Ghana has a full aluminium supply chain, but it is not properly integrated as Ghana’s bauxite reserves are still being refined outside the country before returning to Ghana for conversion to raw aluminium,” Okoh said.

In statement to the local press, Daniel Acheampoing, the deputy CEO of Valco, also underlined the importance of establishing a refinery. He said, “Ghana has bauxite resource at Kibi and Nyinahin that if mined and exported will fetch Ghana about $17.5bn. ... So if we had a refinery in this country and mined the bauxite, this is going to give us about $122m.”

Staying Competitive

Able to produce 200,000 tonnes of primary aluminium at full capacity, Valco has been operating at reduced levels, running only one to two of its five pot-lines since 2006. Whenever national load shedding occurs, the state-run smelter, as the country’s largest individual consumer of electricity, has been called on to bear much of the brunt. From 2003 to 2006, a period of power shortfalls, the plant was closed for long stretches.

Globally competitive aluminium smelting is extremely energy intensive and reliant on low-cost electricity. As such, in recent years there has been debate over the degree to which Valco should continue to receive its electricity at subsidised rates. On the one hand, many industry players, including the World Bank, argue that competing demands for scarce electricity and the lack of funding for national utilities upgrades and expansion programmes make the subsidy unaffordable. On the other hand, Valco is a major job creator and occupies an important position in the country’s industrial value chain, playing an intermediary role in converting mined material into construction materials that are used to build infrastructure. Indeed, Valco’s contribution to the local economy and workforce is an achievement for which many other local industries strive.

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The Report: Ghana 2014

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