July 22, 2017

Duty on steel a protection smoke screen

By Gerhard Papenfus

These have been extremely difficult years for South Africa’s downstream steel industry. While the main steel role players made huge profits, they were able to buy labour peace through high wage agreements.

These forced agreements upon the already embattled downstream industry through the mechanics of the Labour Relations Act – resulting in the prescribed minimum wage in the steel industry being at least 35% higher than South Africa’s second most expensive industry.

ArcelorMittal South Africa (AMSA), South Africa’s dominant liquid steel producer, found the local steel market to be a favourable playing field. For a long time they could keep their input costs low as a result of a preferential supply agreement for iron ore.

Same prices as international customers

However, while having this lucrative iron ore deal, AMSA charged the South African downstream industry similar prices to what they (AMSA) obtained on international markets. The downstream industry paid high prices for their steel, while AMSA made huge profits. At the same time, according to Lionel October, director general of trade and industry, AMSA “… took out all its money via management contracts, paid low dividends to shareholders, made absolutely no investment. It sweated its assets to the point where plants were collapsing”. Then the world in which the steel industry functioned changed completely. The world economy went south and China became a major role player, also with regard to the supply of steel. All of a sudden the downstream steel industry found relief in more affordable Chinese steel. The downstream industry was no longer dependent on AMSA steel alone. This turn of events however did not suit AMSA. When, according to their calculations, the importation of more affordable, good-quality steel from China became a threat, they, instead of upgrading their outdated plants, convinced government to introduce a 10% tax (customs duty) on imports. When, in their view, this was not enough, they applied for further taxes to be levied on imports – this time safeguard duties of an additional 30%.

Protectionism

The 10% customs duty which was introduced last year already serves as a slow poison, killing the downstream industry. It prevents the downstream industry from being able to defend its market share against cheaper imports of finished products. It speaks for itself that if Chinese mills can export their coil cheaper than AMSA to South Africa, how can smaller, more vulnerable South African downstream manufacturers defend themselves against the importation of the Chinese finished products made from the same (cheaper) steel? Any idea of protecting the downstream industry against finished imports is simply a non-starter. The whole idea is a smoke screen and the result of an attempt to justify the protection of AMSA. The downstream industry is simply too diverse to even attempt any ‘protection’ of this nature. It will also be administratively unachievable.

Once you embark on the path of protection, you will always discover unintended, unforeseen consequences. The protection of the one always eventually demands the protection of the other. It’s a never-ending cycle. The answer lies in the lifting of all protection and the forging of a new, creative solution; it lies in the ability to adapt to a new reality. China is the new “steel reality”; protectionist measures are, at most, a temporary solution, delaying the inevitable.

Gerhard Papenfus is the chief executive of The National Employers’ Association of South Africa (NEASA).

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