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ISF Australian visit demonstrates market challenges, opportunities

The International Steel Fabricators of South Africa (ISF) reports that there were no real surprises on its recent annual 'pilgrimage' to Australia. "As expected, the number of new mining projects remains limited and are therefore fiercely competed for by the engineering houses," says ISF director Neels van Niekerk. "The net result is that the Engineering, Procurement and Construction Management (EPCM) companies are under exceptional pressure and the shrinking and reorganising phase continues unabated."

Van Niekerk says that successful members of the ISF visit Australia – an important centre of mining and mining engineering houses - throughout the year but, in addition, every year the ISF leads a specialised delegation, limited to seven companies including structural fabricators, civil contractors, tank suppliers, etc. in order to make formal contact, as a group, with the most active Australian clients.

"This arrangement ensures that our member companies are exposed to a wider and more effective client audience including senior executives from both the engineering and procurement departments," says van Niekerk.

He adds that this also assists in demonstrating to the Australian market - and through it to other important global players - the size and quality of the South African industry as well as its willingness and ability to partner in projects and fast-track them where possible.

The main cities visited were Brisbane for soft rock mining and Perth for hard rock mining developments. As usual the visit concluded with the South African delegates as well as additional members attending the well-known Africa Down Under Conference and Exhibition where the ISF always has a stand.

Market Findings
Van Niekerk emphasises that the Australian EPCM companies have been careful to ensure that their core competencies have not been affected by the shrinking and reorganisation phase as a definite optimism exists that the tough economic conditions in the mining industry have bottomed out.

"Over the years, most of the large EPCM companies invested heavily in large 'procurement' offices in China. These offices were a requirement because, firstly, some mining capital equipment today is almost exclusively supplied from China - e.g. large mining mills – and, secondly, the need to inspect quality and compliance into the end product and to maintain constant pressure to maintain schedule.

"Even when the Australian mining sector came under pressure the investment in these 'procurement offices' was maintained in order for these EPCM companies to keep a tight control on the relationships with the Chinese companies," van Niekerk says. "This policy has to a large extent worked and one of the results is that it is not easy for a new South African supplier to break into this procurement 'investment."

He adds, however, that most of these EPCMs admit that even after a decade of Chinese buying, the challenges remain and that structural steel is increasingly being sourced from elsewhere like, for example, Thailand, the Philippines and also a return to South African supply, to which many EPCMs are turning, especially for plate-work destined for Southern and Central African projects," van Niekerk says.

Another major challenge that this visit emphasised is the 'price per ton' budgeting practice in the purchasing systems. "EPCMs are, in the main, required by their clients to have, at least as an option, 'cheaper Chinese supply'," Van Niekerk says. "This often results in a specification using lower Chinese steel strength standards and profile sizes which, in turn, results in heavier structures - typically between 20% and 50%! -when compared to using the higher steel strength specifications and profile sizes used in Australia, Europe and South Africa," he explains.

He adds that this is exacerbated by the fact that this 'per ton' procurement is mostly executed by procurement staff who are not structural engineers resulting in even more expensive (or equally priced) structures than if the goods had been supplied, for example, from Europe or South Africa.

Shift from EPCM to LSTK for new mine development
Van Niekerk says that he also saw that the shift in the market from the EPCM model to the Lump Sum Turnkey (LSTK) type models for new mine development is continuing.

"Until about two or three years ago the most common practice in the construction industry was for the client to outsource the total responsibility of the contract to EPCM companies who, in turn, outsourced various aspects of the contract to other specialist suppliers. Due to typical cost overruns of over 100 to 150% for project completion, a clear shift towards the utilisation of the LSTK type contract model developed," van Niekerk says.

"In EPCM-type arrangements the project risk is mainly borne by the client. Because the LSTK arrangement brings more of a team-like scenario to all the players involved in a contract, risk is shared more equitably and other important factors like schedule and quality will take their rightful place in the overall equation," van Niekerk says.

He adds that another shift that is occurring is the increasing number of mining houses retaining the overall control of projects including the procurement. In these cases only the engineering is procured from the EPCM companies.

"Both shifts are more favourable for our local industry as procurement is then not only based on budget "per ton" prices as is often the case in the EPCM model, but also on the more holistic approach of assessing total costs, schedule, quality, risk, etc.

Future of South African suppliers for Australian controlled African mining project development
According to van Niekerk the bottom line is that South African suppliers must realise that although they can be price-competitive and even cheaper on a completed project basis, their clients do not necessarily understand or accept that. Furthermore steel structures can today be competitively purchased for Africa from Europe, Africa, the East etc. and South Africa does not necessarily have an edge on this.

"However, competent project management in Africa remains elusive and it is here where South Africans and South African companies excel. For those South African structural steel companies that are prepared to continuously interact with their international clients through 'round-table' discussions on the above principles and which are offering more than just an ex-works or FOB service, the future in Africa remains promising," says van Niekerk.

He warns though, that for the fabricators that are not prepared to get involved in this process it will remain best to avoid the relatively expensive marketing directed at Australian companies. These South African fabricators should rather focus on the few remaining Johannesburg-based EPCM procurement offices," he concluded.

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