By Donald MacKay
The tragedy unfolding at ArcelorMittal South Africa (Amsa) is an outcome of too much policy and not enough market in the steel value chain. Last week in “Business Report”, Kobus Verster, the CEO of Amsa, in his opinion, “SA steel industry needs level playing field,” noted four areas presenting the biggest risks to primary steel production:
Steel dumping
Amsa recently had anti-dumping duties implemented on galvanised steel coils from China. I have no doubt that more anti-dumping applications will follow. However, there are two rather serious problems not being considered.
The first is the 2006 Record of Understanding (ROU) between South Africa and China, which notes that “China will be treated as a market economy for purposes of these (anti-dumping) investigations”.
This has implications for how anti-dumping duties are calculated when South Africa investigates China for dumping. It assumes that China operates like most capitalist economies, with a light(ish) touch of the government on the economy. Nothing of course could be further from the truth. According to the China Iron and Steel Association (Cisa), in 2015, the top five steel groups were all state-owned or controlled.
Many countries don’t grant China market economy status in anti-dumping investigations, which leads to a different way of calculating the anti-dumping duties (they are typically much larger to account for the effect of the non-market economy). For as long as South Africa retains the ROU, anti-dumping actions will only ever deliver limited benefits, particularly on steel.
The second is that South Africa stopped using the countervailing (anti-subsidy) instrument around 2010, which means we can’t directly tackle the subsidy component of imported steel. This was a political decision taken by Dr Rob Davies, flush with excitement from having joined BRICS.
In the period from 2015 to 2022, approximately 202 countervailing duties were imposed globally, with 52% of those on base metals (almost all steel). Forty-seven percent of all countervailing actions in that period were against China, so it’s fair to assume a very large proportion of the steel subsidies acted on were provided by China. We have lost all protection from subsidies.
Although I generally lean hard in favour of open markets, South Africa can’t lose its ability to respond to predatory trade by choosing to use only the most diluted version of half of the instruments it is legally entitled to use as a World Trade Organisation member.
Logistics and power cuts
Fix the rail, ports, and electricity. This is the main job of the government right now – ’nuff said.
Decline in manufacturing and construction – and its impact on scrap metal
All the duties in the world can’t make the pie grow bigger and imposing higher duties on imports won’t fix the low local demand. The slowdown in manufacturing and construction activity also means less scrap steel is available (these are two of the larger sources of scrap metal) and because no one sets up a business to manufacture scrap metal, the way the mini-mills are kept stocked with cheap scrap steel is though the Price Preference System (PPS), which is a forced discount of 30% for the domestic sale of scrap steel. This as the 20% export duty on scrap steel, which was meant to replace PPS, is now added onto all exported scrap steel.
The outcome is that around nine months ago, mini-mills in South Africa were selling steel ex-works at the same price as Chinese steel mills, with no transport cost to get the product into the market. If Amsa is struggling to compete with China, halfway around the world, imagine trying to compete with subsidised producers around the corner.
The Industrial Development Corporation’s R14-billion exposure to the mini-mills, which produce around 20% of the steel in South Africa, is locked in both PPS and scrap metal export duties.
Compare this to Amsa’s market capitalisation of R1.4bn, despite producing 50% of South Africa’s steel. The mini-mills are completely dependent on support and because these subsidies are coming from factories, mines and construction companies, not from the Treasury, the government is happy to keep forcing the transfer of value. Sort of.
The single largest supplier of scrap steel in South Africa is Transnet, and in June 2021 Transnet employees were issued a directive, noting “(t)he purpose of this directive is to inform all Transnet Engineering employees of the decision taken to stop the sale of scrap through auctions… as Transnet will be selling off directly to the steel producers”. So, Transnet too is contributing directly to the subsidy.
Approximately 3 million tons of scrap steel are generated per annum, of which 158 000 tons (5%) are exported, with the balance being consumed by the mini-mills locally. If we assume this scrap was all sold at PPS (30% below global prices – I’ve very conservatively used the average export value for this calculation), this is a value transfer of approximately R8.5bn, in 2023, from the productive part of the economy, to the state-dependent mini-mills. Think about that. The subsidies into the mini-mills equals 20% of Amsa’s revenue for the same period. Then add another R264 million extracted in export duties in 2023, on scrap steel that no one wanted locally.
The situation can’t persist. Ideally, PPS needs to be scaled back to something more sensible. Export duties need to be removed if PPS is to remain, or export duties must remain and PPS must be removed, as was originally promised. What can’t happen is endlessly fiddling with the market to a point where half of our primary steel producer closes and all we are left with are mini-mills extracting R8.5bn out of the economy to provide 20% of the steel consumed locally.
Donald MacKay is the founder and CEO of XA Global Trade Advisors. He has been advising both local and foreign companies on global trade issues for over two decades. X handle: XA_advisors; email: donald@xagta.com; website: xagta.com
BUSINESS REPORT