There is a fear that the IDC’s R14bn loan exposure to mini-mills, many of them in business rescue, could end up dictating tariff policy.
A review of SA’s steel policy, given urgency by the decision of ArcelorMittal SA (Amsa) to close its long-steel production, is turning out to be a decisive moment in SA’s ongoing deindustrialisation.
Amsa is no longer able to compete against imports from Chinese producers, despite being awarded a 52.81% anti-dumping duty on structural steel last year, which comes on top of the 10% duty already in place on imported long-rolled steel.
Needless to say, there is wide divergence on the way out: should Amsa survive or be shunted off to the knackers’ yard? There are arguments for both sides.
“Allowing these plants to close could be catastrophic and it would spell disaster for manufacturing and industrialisation of our country,” says the National Union of Metalworkers of South Africa (Numsa).
Some 3 500 jobs are at risk if Amsa closes its long-steel operations, much more if downstream firms are considered.
Gerhard Papenfus, CEO of the National Employers’ Association of South Africa (Neasa), has called for the scrapping of import duties on all long-steel products with immediate effect now that the company will no longer be involved in long-steel production.
The 2023 Amsa annual report puts domestic production for long-steel products at 2.7 million tons per annum (Mtpa), with local demand sitting at 1.8Mtpa. Most of this is produced by Amsa at a substantial loss, or hoarded as stock, because it cannot compete with cheap Chinese imports (many Chinese mills are also running at a loss), nor with heavily subsidised domestic mini-mills.
Add to that 1Mtpa of idle capacity at SA’s mini-mills and the country currently sits with about 2Mtpa of surplus capacity.
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Government has poured massive subsidies into mini-mills
Contrast Amsa’s position with that of the mini-mills in which the Industrial Development Corporation (IDC) is so heavily invested – to the tune of R14 billion, which is about 10 times the market cap of Amsa.
These mini-mills enjoy numerous benefits that Amsa does not.
They use scrap metal as their feedstock, gifted to them at 30% (or more) below market prices due to a price preference system (PPS) that was introduced in 2013 by then minister of Economic Development Ebrahim Patel, who later became minister of Trade, Industry and Competition.
The ostensibly noble purpose of the PPS was to ensure a readily available and affordable supply of scrap metal for local steel manufacture by requiring scrap dealers to first offer their scrap to local buyers at a 30% discount to international prices.
The seller of the scrap must also cover the costs of transport to the domestic buyer, which further discounts the product. If the cost of transport exceeds the profit which can be made, the scrap remains unsold or finds its way to landfills, creating environmental problems.
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A huge transfer of wealth
The PPS amounts to a massive transfer of value from scrap metal dealers to the buyers.
“The amounts at play here are staggering,” says XA Global Trade Advisors CEO Donald MacKay in a recent scrap metal report.
“Approximately R8.5 billion per year is transferred in value from the steel scrap generators to the steel scrap metal consumers. Another R463 million is paid per year in export duties on scrap metal that nobody wants (R339 million).
“Few sectors of the economy demonstrate the unintended consequences of industrial policy better than the scrap metal sector in South Africa. We have market failures, attempts to correct those failures with subsidies, export duties and preferential finance, resulting in suboptimal outcomes for almost everyone. But of course, never truly everyone.”
What we have ended up with is a convoluted system of protectionism that delivers benefits to the protected parties, paid for in the form of a hidden tax by the consumer.
No one complains about this because they do not see it.
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Then came the 20% export tax on scrap
The PPS was originally intended as a temporary measure and was to be replaced by an export duty on scrap metals. What happened is that we ended up with both. Mini-mills now enjoy protection in the form of a PPS and a 20% export tax, which was introduced in 2020.
The South African Revenue Service (Sars) said the purpose of the export duty on scrap was “to provide foundries and mills with better access to higher quality and more affordable scrap metals in the local market.”
This in turn would make them more competitive and attract investments, create employment and support industrialisation.
“It will also ease the pressure brought upon by unfair trade practices within the domestic metals industry,” said Sars.
None of this has come to pass.
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Preferential – for whom?
Mark Fine heads up the Scrap Recycling Coalition, an informal grouping of 48 scrap metal dealers. He says the 30% discount on scrap metal imposed by the PPS understates the scale of the discount.
“From early 2021, the large-scale melters of scrap began imposing (bear in mind that the melters of scrap dictate prices, not scrap dealers) additional discounts on the price that they paid the scrap industry for steel scrap, on top of the already discounted PPS price. By November of 2021 that further discount had grown to R1 500/tonne, equivalent to an additional 30% off the PPS discounted price,” says Fine.
What happens in practice is scrap is offered to the local market at a 30% discount and the mills put in “blocking” offers, which are offers to purchase never carried through.
The purpose is to depress scrap prices even further than the PPS discount allows.
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Government’s costly tinkering
Fine adds that governmental tinkering in the metal business means scrap can be delivered to a South African mill such as Scaw or Cape Gate at around R3 650/t, while mills in India are paying the equivalent of R6 300/t, a difference of R2 650/t.
These companies each melt about 45 000 tonnes of scrap a month, meaning local mills are benefitting to the tune of about R600 million every month.
This, says Fine, amounts to a transfer of wealth from every part of the SA economy – downstream users of metal, Transnet, construction and other sectors – to the steel mills.
Some 72% of scrap metal is supplied by an army of 300 000 subsistence collectors, who likewise are denied the full fruits of their efforts due to the price preference system put in place by Patel.
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Industry plea
Amsa CEO Kobus Verster has called for higher duties on imported steel from China to protect the local industry.
In this he is supported by Neels van Niekerk, executive chair of International Steel Fabricators: “I suggested to the minister (of Trade and Industry) to stop interfering with the scrap metals business. We must support steel making and value-added products with duties.
“If we do not protect the steel sector against China, we will lose it all,” says Van Niekerk.
“If Amsa long products disappear, about 450 000tpa [that it produces] cannot be replaced by the mini mills for quantity, quality and for a range of product reasons.
“Eighteen steel intensive industry associations formally advised the government of this inability on 19 January 2024.”
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IDC is heavily invested in steel
The IDC is, and has been, heavily invested in SA’s steel sector.
Apart from its stake in several mini-mills, it has debt or equity exposure to companies such as aluminium producer Hulamin, Scaw Metals and Duferco Steel Processing.
In 2012, it bought 74% of Scaw Metals from Anglo American for R3.4 billion and occupied several positions on its board.
In 2018, the Competition Tribunal approved the purchase of Scaw by Barnes Southern Palace, subject to restrictions on the sharing of price sensitive information with Consolidated Wire Industries (CWI), a producer of mild steel wire and wire products that is jointly owned by Amsa SA, Scaw and the IDC. The IDC retains a minority stake in Scaw.
This article was republished from Moneyweb. Read the original here.
