There’s no denying it: climate change is reshaping the business landscape. It puts companies in something of a quandary: the transition to low-carbon operations comes at a cost – but so does doing nothing.
Nowhere is this more evident than in South Africa’s metals manufacturing sector, which is squarely in the firing line. Steel producers, in particular, face mounting pressure to decarbonise as two powerful forces converge: the newly enacted Climate Change Act at home and an EU rule that will penalise carbon-intensive imports.
“We understand something needs to be done, however, the cost of the transition is prohibitive,” says Tafadzwa Chibanguza, COO at the Steel and Engineering Industries Federation of Southern Africa (Seifsa). “Our industry is a big emitter, and given the nature of the technology, it’s a hard-to-abate sector.”
The Climate Change Act, signed into law in July 2024 and enacted on March 17, consolidates South Africa’s climate framework under a single piece of legislation for the first time. While key regulations – such as those governing carbon budgets and mitigation plans – have yet to be finalised to give the act more teeth, the public and private sectors are both bracing for tougher compliance requirements.
Those regulations should be ready by the middle of the year, environment, forestry and fisheries minister Dion George said in a recent interview with eNCA.
Overall, the act is a step in the right direction, says Chibanguza. It brings more clarity to climate policy, shows global investors that South Africa is serious about tackling climate change, and makes it easier for companies to understand and follow the rules. Importantly, government has reassured businesses by committing to a realistic, affordable pace of change that takes South Africa’s economic challenges into account.
The act also lays the foundation for market-based tools like emissions trading or carbon offset schemes. Setting carbon budgets for individual companies allows those that cut their emissions below their targets to trade the extra allowance with others, creating a financial incentive to reduce emissions in cost-effective and innovative ways, while helping South Africa meet its global climate commitments.
This system is built around sectoral emission targets for major industries such as energy, transport, industry and agriculture, which are based on how much each contributes to the country’s overall greenhouse gas emissions.
The steel slump
The steel industry is already buckling under the weight of a slump in local consumption due to a moribund economy, excess domestic capacity and surplus Chinese supply looking for new markets. Take ArcelorMittal South Africa: the government was forced to step in and agree to pay the salaries of its long steel business in the hope of saving 3,500 jobs. Meanwhile the state-owned Industrial Development Corporation injected cash into the business to help keep it going.
Seifsa suggests the government find smart ways to encourage companies to embrace the transition to decarbonisation, as handing out grants would be too costly. One idea is to fund steelmakers that are exporting “green” steel to the EU, which pays a premium for sustainably produced metals. Given that there will be a strong business case, the extra profit could help offset the cost of going green.
“The same is true in the hydrogen space,” Chibanguza explains.
“The other way would require [National] Treasury to deviate from its policy of not ringfencing revenues,” he says. “For example, the carbon tax instrument is already in place, and industries are paying carbon taxes. And the trajectory of carbon taxes is only expected to increase.”
That money could instead be reinvested back into the industry and “that in itself could potentially mitigate the cost of the transition”, Chibanguza adds.
The steel industry faces a separate challenge. As part of the EU’s efforts to cut greenhouse gas emissions by 55% by 2030 and reach net-zero emissions by 2050, it introduced the carbon border adjustment mechanism (CBAM) – a tool designed to prevent carbon leakage, where companies move production to countries with weaker climate rules to save costs.
CBAM will apply a carbon tax on certain goods imported into the EU, based on how much carbon was emitted in making them – minus any carbon tax already paid in the exporting country. The first sectors affected include iron and steel, aluminium, cement, fertilisers, electricity and hydrogen – all heavy emitters.
The rollout will be phased: 2023-2025 will be a transitional phase, with reporting only and no payments required; from 2026-2034 there will be a gradual introduction of carbon costs on imports.
A ‘greening tool’
For South Africa, which relies heavily on coal and has a carbon-intensive economy, this poses a serious risk – exports to the EU account for 22% of total exports by the metals and engineering sector, or R75bn annually, according to Seifsa data.
Companies that are exposed to the EU realise that their markets “are likely to erode” and are “proactively responding to this”, Chibanguza says. However, the issue is clouded by the department of trade, industry and competition’s decision to oppose CBAM as a trade barrier rather than see it as a “greening tool”.
By lumping itself with Brazil, India and China in the fight, South Africa risks excluding itself from countries that together account for 36% of metal and engineering sector exports and which are either developing similar policies or adapting their prices locally to respond to CBAM.
Seifsa is finding it difficult to convince small or medium-sized companies to embrace the transition because they’re more engrossed in an immediate and daily struggle for survival than focusing on a target that’s 25 years out.
“We cannot bury our heads in the sand,” he adds. “This is coming.”
For Khatija Kapdi, an attorney at global law firm Dentons, there’s a “cost to doing it, but there’s a greater cost to not doing it”.
“When does your opportunity become a risk?” she asks.
“Many South African businesses right now are sitting in the opportunity space. We can look to the horizon and say: ‘Okay, this is happening. I can adapt to this. I can have a very different business model concerning how I respond to climate change. Or I can sit back and, in a few years, find myself in hot water regarding my reputation for my inability to transition and my inability to mitigate and adapt,’” says Kapdi.
There’s no going back: the act is aligned with global trends and is moving South Africa forwards – despite the costs. So, how companies respond is “a critical strategic business decision that people are either going to get or not get”,” says Kapdi.
“It’s hard to see the real risk because it has not yet materialised. It is seen as a nice to have today until tomorrow, when it hits you hard.”
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