IN the last three instalments, I have endeavoured to show the historical background and importance of NRZ, Ziscosteel and Hwange Colliery to the economy and its industrialisation bid. I went on to look at the problems these interrelated companies have faced and so in this instalment, I look at the solutions to some of the problems raised and how the three giants can be resuscitated for the good of the country.
The iron and steel industry is crucial for economic development as it has major spin-offs to other industries. It supports the energy sector through its high demand for energy inputs, the mining sector through its demand for raw materials such as ore and limestone, and the manufacturing sector by supplying partially processed products as inputs. It also supports the construction industry and special sectors such as gas and chemical distribution.
During the production period spanning between 1980 and 2008, the Ziscosteel plant never operated to full capacity. The best capacity utilisation achieved was 58 percent. In contrast, the global capacity utilisation averaged around 81 percent for the period between 2000 and 2011. It is worth noting that the major capacity limitation at global level was the market demand rather than production challenges as in the local scenario. South Africa’s production capacity was reported to be more than 10 times that of Ziscosteel capacity. It is critical to note that the South African production capacity met both its domestic and regional demand, with an excess capacity of over 40 percent. The implications are that the competition on the regional market becomes very stiff for Zimbabwe, which has to leverage on its competitive advantages to remain viable as it plans to resuscitate the iron and steel plant. It is also worth noting that in both case studies (Zambia and South Africa), the iron and steel-making plants are more diversified, and i.e. they do not rely on a sole player and hence reducing the risk of value chain breakdown in case one actor closes shop.
The major constraints limiting capacity utilisation were the inconsistent supply of critical raw materials like coal from Hwange due to the supplier’s own constraints and the unreliable NRZ transport network; inconsistent quality of raw materials (coal) as well as erratic power and water supply. Coal production in the region shows that Zimbabwe has a competitive edge over the other Sadc countries except for South Africa. Zimbabwe’s production, despite being the second to South Africa, is about 1,1 percent of the latter’s production. The major supplier of limestone is Bimco, whose capacity utilisation has decreased significantly since it heavily depended on Zisco steelworks market for its sales. The other factor is the lack of adequate capital to purchase spares for maintenance and to upgrade the available equipment in line with global processing trends.
Need for better technology at Zisco
The technology in the iron and steel industry has developed from simple inefficient open-hearth furnaces to sophisticated technologies such as Corex, Midrex and HISmelt. Inefficient technologies such as batch casting are being phased out for more efficient ones such as continuous casting, which have significantly lower intensities and have greatly improved production efficiency. Blast furnaces have been improved from basic furnaces to very sophisticated and fully electronically monitored that has resulted in reduced energy consumption and increased productivity. In general, due to development of alternatives and technological advancement which, resulted in improved energy efficiency and de-materialisation, steel-making technology has advanced significantly allowing great strides in production efficiency throughout the industry from iron and steel production to related manufacturing industry and this is the route Zisco should take if it is to become viable.
Cost drivers of production at Ziscosteel, NRZ and Hwange Colliery
Zimbabwe’s international trade flows, and their composition, point towards a sustained loss of competitiveness. Merchandise imports have risen twice as fast as exports in the last eight years. The composition of those exports has changed over that period, as more concentration in minerals and metals is observed. Following the adoption of the multi-currency system in 2009, the economy faced increased competition from South African imports, its main trading partner. The rand has depreciated against the US dollar from levels of US$1: ZAR7 in 2009 to US$1: ZAR14, which has in turn made South African imports cheaper. The depreciation of the rand adversely affects the competitiveness of Zimbabwean companies whose costs are on a stronger currency. Some of the cost drivers that need to be contained in order for NRZ, Zisco and Hwange Colliery to become viable once again include the cost of labour, power/electricity, cost of borrowing or financing and cost of transportation of bulky goods.
Containing the cost of electricity
The iron and steel industry is inherently energy intensive. While industry in general accounts for over 50 percent of national commercial energy demand in most developed countries and less for developing countries, for most economies over 15 percent of this energy is consumed in the iron and steel industry. Since energy costs are a major contribution to production costs in this industry, energy efficiency becomes an important and urgent issue for consideration. In 2000 Unido/Comesa commissioned a study on energy conservation at Ziscosteel and Steel Makers Zimbabwe. The study established that savings of between 30-40 percent could be achieved through:
Reduction of combustion heat losses and increasing heat recovery
Integration of maintenance procedures related to energy efficiency into regular maintenance procedures
Application of potential heat recovery systems from boilers and furnaces for preheating inputs such as water and air and use of exhaust gases
Use of more efficient compact lamps instead of incandescent and fluorescent lamps for lighting in administrative offices and factory shades
Power factor correction and use of automatic load control for electric motors
The study also established that Zisco could increase power generation for own use and export to the grid through high pressure Condensing Extraction Steam Turbines (CEST) technologies using BF and CO gas instead of the currently installed low pressure boilers. The first five measures had a payback period of less than one year while the last one had a payback period of two years and an energy saving of a factor of three.
All these suggestions have never been implemented and if they are to be revisited then Zimbabwe can be able to produce steel at optimal rates and make Ziscosteel a success once again. As of 2014 industry was required to pay an effective tariff of 14.5 US cents per kilowatt/hour to avoid load shedding in Zimbabwe. The average of the four neighboring countries (Botswana, Mozambique, South Africa and Zambia) at the lowest level of commercial consumption was 8.3 US cents per kWh, which was 57 percent of what Zimbabwean businesses paid. Sixty percent of power is generated at Kariba at a competitive cost (hydro power), a benefit that is being washed away by much more inefficient thermal stations. Options to optimise power generation include the attraction of private capital into existing thermal power generations through public private partnerships (PPPs) and separating Kariba to use it strategically for new expansions into hydro generation.
Cost of borrowing
On average, Zimbabwean firms borrowing costs (at an average of 28 percent in 2013) are twice to three times the levels observed in the region. These high lending rates are reflecting the combined effect of several factors, but “paramount among them is widespread perceived country risk and limited investor confidence” which is constraining the ability of the financial system to mobilise savings to be used for investment. Besides risk, other factors include high levels of non-performing loans, high bank concentration of assets (indicating limited competition in the sector), and high operating costs. Risk reduction in the economy to make capital affordable and improve access to finance should be a priority in light of the higher costs it imposes on domestic firms. Improving reliable credit information and collateral mechanisms is recommended, as well as improvements to the business environment more generally. In this regard, all other policies recommended should improve the risk profile of the Zimbabwean economy. In addition, strengthening public-private dialogue within the reform process will ensure that the reforms enacted are captured by influential international indexes such as the GCI and The World Bank Doing Business Index, lowering the risk perceived by international investors which can lead to increased investment prospects and liquidity for the three companies.
Cost of labour
Minimum wage levels indicate higher labour costs in Zimbabwe when compared to Zambia, Botswana, and Mozambique.
However, the trend observed in the last eight years reveals large increases that do not appear to be justified by increased economic growth or productivity, at a time when the economy faces increased regional competition from devaluation in neighboring countries. From 2009 to 2013, the minimum wage in Zimbabwe (in US dollar terms) increased from US$90 to the US$246,50 level (a total increase of 173,84 percent) which translated into an average annual growth of 28,6 percent.
To be continued next week.
Butler Tambo is a Policy Analyst and can be contacted on firstname.lastname@example.org