A MUST READ: The economic consequences of Ebrahim Patel, Part II: Sacrificing jobs to steel tariffs

THE ECONOMIC CONSEQUENCES OF MINISTER EBRAHIM PATEL
PART II:

SACRIFICING JOBS TO STEEL TARIFFS

First published in Daily Friend on 02 June 2021

by Jonathan Katzenellenbogen
 

The government is protecting South Africa’s only primary flat steel producer, and about 5 000 jobs, from foreign competition – but as a result, the wider steel industry, which employs 420 000 people, is suffering.

Local companies that use steel to make everything from door frames to gates to roofs are being squeezed by the protection of the country’s monopoly producer, ArcelorMittal South Africa, AMSA. They have to pay almost the international price, plus an 18 percent duty on the main input steel material of industry, hot-rolled steel coil. And then many face competition from imported finished products that attract no or little duty. On price alone, this allows imported product to wipe out their local competition.

The short-term trade-off is clear – lose the local steel producer and 5 000 jobs and ensure a better chance for many firms and at least 420 000 people. In any cost-benefit analysis to decide what course of action to take to preserve jobs and contribute to economic growth, the higher tariff on imported steel is an unjust and bad choice. But the government and Trade, Industry and Competition Minister Ebrahim Patel seem intent on protecting the local producer to ensure that steel continues to be made in the country.

Almost four years ago, the International Trade Administration Commission, a government entity that is not entirely independent from political interference, imposed a ‘safeguard’ duty on imported hot-rolled steel. This is allowed under World Trade Organisation rules as a temporary relief measure to give the affected industry time to adjust. The duty was the result of an application from AMSA in the face of rising steel imports from China. What was meant to have been a temporary duty was charged on top of a normal import duty of 10 percent. Initially set at 12 percent, it was later reduced to eight percent for three years.

The eight percent safeguard duty that is used to protect AMSA was meant to have expired in August last year. But after only cursory consultation with the industry, this was extended.

Industry pleas to Minister Patel to scrap the duty have not worked. The only real hope for relief now lies in the courts. Macsteel, the country’s largest steel merchant, has brought a case to challenge the government’s decision on procedural grounds, alleging lack of proper consultation. If this fails, we could see more jobs and firms disappear.

Protecting the steel producer might be based on ideology and pride rather than economic logic: Minister Ebrahim Patel’s overarching goal is to see the ‘localisation’ – local production – of as many goods as possible as fast as possible.

Apartheid planners, fearful of sanctions, tried to build a siege economy, but it came at a huge price to consumers, taxpayers, and the economy. It is inconceivable that South Africa would not be able to buy steel today. If steel can be landed at a low competitive price, we should be allowed to benefit from that. While it is acceptable to give a protected firm a short period to make changes and investments to take on a threat, four years of protection is beyond reasonable bounds.

Trap of protection

Let other countries sell us steel at a subsidised price and allow the fabrication industry and its exports to grow. But the trap of protection is an alluring one as it makes at least political sense in allowing a country to show that it too can make steel, even if this is loss-making. South Africa is not alone in imposing safeguard duties to try to keep out cheaper Chinese steel.

What is so deeply unfair to its customers is that AMSA’s price-setting mechanism is distorted. Since 2006, AMSA has priced its steel products off a basket of prices of the major producers in Europe, the US, and India, but not China, which tends to sell at the lowest prices. While the company rejects the accusation of import-parity pricing, which means domestically produced steel is sold at the same price as the imported product, users complain that this is the case. Import-parity pricing has long been the bane of local buyers of plastics, cement, steel, and paper, all of which are key inputs into core industries. This undermines our industrial growth and international competitiveness.

With international steel prices rising and continuing critical product shortages, due to a combination of the global economic recovery and locally, due to AMSA being unable to meet demand, South African users are being further squeezed. While companies sitting on large inventories are doing well, many in the industry are facing financial distress.

Rebates on imported steel are available from the Revenue Service, but importers complain that these can take a long time to obtain. And if the final goods are exported, a rebate is especially difficult to obtain because it is the original importer that must apply to the Revenue Service. Government bureaucracy often finds it difficult to deal with the fact that the exporter might not be the original importer.

From January 2017 until August 2019, short of three years, and all before the Covid-19 economic lockdown shock, nearly 730 metal fabricators and big steel users were liquidated, out of a total of about 11 000 firms in the wider industry. There are currently 315 firms in this sector in business rescue, which is often the last resort to avoid liquidation. More will have collapsed in the past year with the Covid-19 lockdown.

Backlog problem

AMSA cut production during last year’s tight lockdown, but said it would deal with the backlog problem toward the end of last year. However, a manufacturer of gates complains that normally he receives monthly steel deliveries of locally produced steel, but for some time he has had to wait for up to two months. As a result, his firm cannot complete projects and could be forced to shut down. In addition, he complains about the variable quality of AMSA steel.

The eight percent safeguard duty is effectively a form of subsidy for AMSA, a subsidiary of a Luxembourg-based multinational, its local empowerment partners, and other shareholders of the Johannesburg Stock Exchange-listed company. The safeguard duty only benefits a small part of the entire industry value chain, while many imported fabricated metal products come in tariff free. There is clearly a serious and unjust balance in the tariffs structure, although a result of trade agreements. AMSA says it would support a rise in tariffs on end products, but this has yet to be imposed.

AMSA made a loss in its 2020 financial year of about eight percent of its revenue, the same percentage as in the previous year, although it had a far larger total loss. Some AMSA plants are 70 years old and highly energy intensive. Its profitability has been hurt by the four-times rise in electricity prices over the past 13 years, and the road and rail transport problems that beset industry in our country. It will always be difficult for an ageing plant to compete against massive mills with enormous economies of scale.

This entire saga points to an enormous lost opportunity in the push for growth.

For more information:
NEASA Media Department
media@neasa.co.za