South Africa Metals Report Q4 2010 - New Market Report Published

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Major challenges to growth remain. Access to raw materials is also a long-term concern for South African producers. Iron ore reserves are depleting, while power shortages and labour unrest continue to disrupt mines. In the short term, steel suppliers will face cash-flow problems and will be focused on merely treading water. This will limit capital investment in new capacity and we do not expect major increases in capacity until H211 at the earliest. Steel prices will rise, not as the result of any significant tightening of the market but because of cost pressures, notably raw materials and electricity. These factors will be a major hindrance to growth over the medium term, particularly if the proposal for a 35% increase in electricity prices over the next three years goes ahead. The price hike will raise costs at EAFs and smelters as well as the costs of manufacturers down the production chain and buyers in end markets. A factor sure to hinder production in South Africa is the current energy crisis hitting the state's energy provider, Eskom. While the provider is coming under increasing pressure to meet energy demands, utilities in key aluminium-producing regions like Russia are generating electricity from relatively lowcost hydro sources. This, coupled with low operating costs at sites in regions such as the Middle East, have further hindered the South Africa's chances of making an impact upon the aluminium market, especially in the short term.

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