Remedies mulled as SA autocat sector’s survival becomes uncertain

28th February 2014

By: Irma Venter

Creamer Media Senior Deputy Editor

  

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Magneti Marelli South Africa is closing its doors. The Gauteng-based catalytic converter manufacturer, family of the Italian Magneti Marelli conglomerate, will halt production at the end of February, and shut down finally at the end of April.

The company once employed 92 people.

GM Claudio Di Martina tells Engineering News that the company is “not competitive enough to receive any more export contracts from Europe”.

He says Magneti Marelli South Africa found itself unable to compete under government’s new Automotive Production and Development Programme (APDP), implemented in 2013. The APDP replaced the Motor Industry Development Programme (MIDP).

“The new rebate system had disadvantages for us, and for the rest of the catalytic converter industry too, I believe.”

Di Martina says it is largely vehicle manufacturers that benefit from the APDP, and not the component industry.

“I couldn’t even cover my export transport costs.”

Di Martina adds that South Africa’s logistics and transport costs are “some of the highest in the world”.

He notes that last year’s seven-week strike in the automotive industry also made “Europeans nervous about the stability of the South African economy.

The exchange rate is favourable for exports,” he adds, “but not for material imports”.

The rand has weakened sharply against the major currencies over the last six months.

Autocat Industry ‘Dying’
Total catalytic converter exports from South Africa dropped from R19.6-billion in 2011 (almost 50% of all component exports) to R16.3-billion in 2012. Catalytic converters remained South Africa’s number one component export in 2012.

In 2008, at its peak, the local industry earned R24.3-billion.

It employs around 5 200 people.

A catalytic converter is a device incorporated into a vehicle’s exhaust system, containing a catalyst for converting pollutant gases into less harmful ones. It makes use of platinum-group metals (PGMs).

South Africa has about 75% of the world’s PGM reserves, and is the world’s largest producer of platinum, with Russia second.

Despite these riches, the local catalytic con- verter industry is dying, says National Associa- tion of Automotive Component and Allied Manufacturers (Naacam) executive director Robert Houdet.

“The APDP cannot ensure its sustainability. We need to take it out of the APDP and go to the Department of Mineral Resources (DMR) to try and set up a programme for catalytic converter manufacturers, where they can benefit from the fact that they beneficiate PGMs.”

Former Naacam executive director Roger Pitot said in 2012 that the benefits offered to local component manufacturers would be lower under the APDP than under the MIDP, noting that some global vehicle manufacturers had not renewed their contracts for the supply of catalytic converters from South Africa.

Production Tax?
Finding a solution to the lack of global competi- tiveness of the catalytic converter industry “is a matter of urgency,” says Houdet.

The decision to set up a catalytic converter plant is taken around three years in advance.

“For production of catalytic converters to still take place in South Africa three years from now, we need to be able to make a competitive offer right now, otherwise we will lose out. We have to move fast, and make sure we change people’s minds, because they are already ruling South Africa out as a possible manufacturing destination.”

To ensure the survival of the catalytic converter industry, Houdet proposes that government charges a production tax on all PGMs produced in South Africa.

“Nobody says we cannot increase our prices. The mining company can add the tax as an item on the invoice when charging their customers. The Middle East had similar policies when they controlled the world’s oil resources in the 1970s and Mozambique is mulling increasing its coal royalty tax. Everyone is doing it.

“We have platinum. This is a once in a lifetime opportunity and government must have the courage to implement this tax.

“The production tax will serve as an incentive to manufacture catalytic converters in South Africa, as local manufacturers could either receive a tax rebate, or see the tax eliminated through “some local value-add formula”.
Houdet says the catalytic converter industry would ask for only a small part of the production tax, with the rest going to the fiscus.

“We need to make this the cheapest place to produce catalytic converters. Such a move would also benefit the stainless steel industry.”

Cross Govt Subsidy to be Explored – DTI
The catalytic converter industry in South Africa developed predominantly on the back of the Department of Trade and Industry’s (DTI’s) MIDP incentive scheme, which was discontinued in 2013, says DTI automotive chief director Mkhululi Mlota.

This is because government’s financial incentive for exported production was based predominantly on the value of local content, including material.

This meant the relatively high platinum value found within a converter provided a high level of reward, compared with the level of actual manufacturing value-add, explains Mlota.

During the roughly two decades of the MIDP, the local catalytic converter sector peaked at around 16% of global production.

However, apart from coating and canning, no further value-chain activity was realised in South Africa, says Mlota.

“Under the APDP, the system has moved to one which rewards any qualifying automotive production related directly to its level of manu- facturing value addition.

Cognisance was taken of the expected impact on catalytic converter production, and a transitional support package was put into place by the DTI.”

This support package placed converters into the category that receives the highest level of production incentive, and also provides a level of recognition for the value of local material (platinum).

“This was termed the vulnerable sector support package,” notes Mlota.

In spite of the package, however, the subsector remains “under extreme pressure”.

Outside the APDP/MIDP dynamic, there is also a trend to move some production away from South Africa, owing to logistic costs and the extra capacity available in catalytic converter factories closer to major vehicle assembly plants, says Mlota.

“While as much as possible is done to support the industry through the APDP, there is a danger of oversubsidisation if the incentive is maintained at MIDP levels – especially given that the industry had approximately two decades of significant support and never developed beyond that level, which made it so vulnerable,” says Mlota.

However, he adds, 2014 is also the year of the first detailed APDP review.

The dynamics examined will include vulner- able sectors, and the implications for any changes to their circumstances.

“Further, other, cross-governmental, non-APDP support measures need to be explored, especially in terms of the supply-side factors faced by catalytic converter producers,” says Mlota. “Under present material cost conditions, there is no geographic benefit to beneficiating platinum close to its source.”

APDP Review Under Way
Trade and Industry Minister Dr Rob Davies said in October last year that the APDP, implemented on January 1, 2013, and running until 2020, would be the subject of an early review.

He said the aim of the early review would be to “create conditions of confidence” for the auto- motive industry in South Africa.

“We are all committed to work together to ensure our industry has a bright future.”

This government-led review has started, says Houdet, with the process headed by Pitot.

It is scheduled to be completed in October.

Naacam is seeking a number of changes to the APDP, says Houdet, but notes that it would be premature to discuss these changes, as the association has to consult its members and the vehicle manufacturers before making any submissions.

No Other Industry Beneficiates PGMs – CCIG
Magneti Marelli is a smaller player in the South African catalytic converter industry, says Cata- lytic Converter Interest Group (CCIG) executive director Ken Dewar.

“Some of the bigger players are getting new contracts,” he acknowledges.

General Motors South Africa, in partnership with component manufacturer Tenneco South Africa, last year clinched a R6-billion contract to export catalytic converters to North America.

However, this said, Dewar knows of yet another manufacturer “potentially closing down”.

“We have seen the benefits to the industry shrink under the MIDP, and they continue to do so under the APDP.”

Dewar says the CCIG would like government to put this decline in benefits on hold.

“If not, our industry will die.”

Dewar says the CCIG has been told that there are only a finite number of benefits available under the APDP, and that the industry would need to approach the DMR for additional aid.

To date, two years of engagement with the DMR had not produced the desired results, with a new proposal now headed to the DMR, DTI and Cabinet.

“We can double or triple the amount of PGMs we beneficiate if we can receive more benefits, such as through a production tax,” says Dewar. “No other industry in South Africa beneficiate PGMs.”

The South African catalytic converter industry produces 10-million converters a year.

“We do not expect to do more in 2014. At the current rate, we see the industry declining by 5% a year over the next three to four years,” says Dewar. “A lot of the manufacturers are currently working at 50% capacity.”

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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