Domestic ferrous scrap consumers say price preference system is not working

28th November 2014

By: Terence Creamer

Creamer Media Editor

  

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There is widespread consensus that the Price Preference System (PPS) –introduced in September 2013 to restrict the export of scrap metal before it had first been offered for sale to the domestic consumers at a 20% discount to an international benchmark price – has not been effective. There is also little optimism among ferrous scrap recyclers and consumers alike that proposed changes to the PPS will improve the outlook for the pricing and availability of scrap metal.

The International Trade Administration Commission of South Africa (Itac), which administers the PPS, has published amendments to the policy guidelines, including one proposing an increase in the price preference rate for steel and stainless steel scrap from 20% to 30%.

Itac senior manager for import and export control Philip Snyman tells Engineering News Online that the policy guidelines are designed to improve the effectiveness and administration, as well as address “certain shortcomings that were identified in the original guidelines”.

But ferrous scrap consumers remain unconvinced that changes to the PPS will be sufficient to materially improve either domestic availability or pricing of scrap metal.

Scaw head of operations Steve van Wyk says “very little” has changed since the introduction of the PPS.

He tells Engineering News Online that the scrap industry has found ways to circumvent the regulations, “by taking advantage of commercial terms not being specified in the PPS and by demanding unreasonable and onerous conditions in the negotiation process, to ensure that no agreement is possible”.

The South African Iron and Steel Institute (SAISI) warns that access to good-quality local scrap is being hampered and the primary steel mills are experiencing difficulty in procuring material under the current Itacguidelines.

ArcelorMittal South Africa (AMSA) confirms this view indicating that, while the system has been designed with good intentions, it has failed to achieve the desired objectives.

“The export of scrap is now even more aggressive than before the regulation was promulgated. In our view, decisive action needs to be taken to restrict the export of scrap,” AMSA tells Engineering News Online.

South African Institute of Foundrymen CEO John Davies agrees that there has been little or no impact.

But he also stressed that the foundry industry is in a different position to the steel mills, owing to the fact that most foundries use only a few grades of material, which are not usually seen on the permit application lists.

“So it is suspected that foundry grades are mixed with lower grades to ‘sweeten’ them and exported in this way rather than being available to the foundry industry,” Davies tells Engineering News Online.

He highlights a recent example, where foundry suitable material was listed on the export permit application list, but a member foundry could not reach the applicant by any means within the prescribed period, so the opportunity was lost.

“Other tactics are that the purchase prices and terms are not agreed and therefore the permit is issued as well as the price quoted being an ex-works price making collection impossible. In some instances scrap is melted locally and exported as billets, and so by-passing the permit application system.”

ALTERNATIVE INTERVENTIONS

SAISI reports that its members have made representations to Itac to raise their concerns with the PPS and to suggest alternatives.

Scaw’s Van Wyk believes a more equitable and simple model would be to place a tax, or levy, on each application for an export permit. The levy could be calculated as a certain percentage of the international benchmark price and be payable to the South African Revenue Service on the issuance of the export permit.

AMSA argues that an export duty system would be the easiest to implement and should encourage local sales.

Davies is less prescriptive, but argues that the intention of making scrap material available at a lower cost to local consumers is “patently not working for the ailing foundry industry”. For this reason, an alternative mechanism should be sought to improve supply and enforce a discount, while “ensuring that the margin of the recycler is not diminished and that employment levels are not reduced”.

AMSA is equally concerned about the fact that the PPS disadvantages scrap merchants that sell to domestic steel mills, as there is a natural resistance to selling at a lower price. “If one scrapyard decides to export and another decides to sell to the domestic foundries, how will the one selling to the domestic market ever be able to compete in collecting scrap, when they are at a 20% disadvantage?”

Davies suggests more implementable mechanisms are available, pointing to remedies outlined in the Conningarth Report tabled two years ago. He argues, too, that an outright banning of scrap exports could be considered, but is likely to have unintended consequences for collections and recycling sector jobs.

Metal Recyclers Association (MRA) chairperson-elect Quintin Starkey agrees that the PPS has not been effective. “To our knowledge none of the major consuming works subscribe to the PPS. The fundamentals on which the PPS was formed is flawed,” Starkey argued, while dismissing arguments that the scrap industry has found ways to circumvent the regulations.

“The current system is not working and the MRA believes that the proposed changes will have little or no effect,” Starkey adds, warning that export taxes and/or export bans would be contrary to South Africa’s World Trade Organisation commitments and would place further strain on the low-margin recycling sector.

“The MRA continues to seek a platform whereby role-players in the industry can discuss various stumbling blocks with the PPS – of which there are many,” he adds.

Starkey also makes specific reference to the Conningarth Report, which tested various intervention measures and where the results were vetted by both the recycling and consuming industry.

The report cautions against directly controlling the export of scrap, warning that such a move could negatively affect the foundry and scrap metal industries. “Imposing physical quotas will have a positive financial effect on the foundry industry, but will lead to job losses. Export price control by means of export taxes or other means will have a negative financial as well as negative direct employment effect.”

The intervention scenario proposed for ferrous scrap is to promote the local production of castings by “paying a supply grant to the scrap metal recyclers per tons supplied to the foundry industry”.

Itac’s Snyman could not be drawn, though, on persistent calls by scrap consuming sectors for an overhaul of the PPS in favour of either a tax or an outright ban on the exportation of ferrous scrap.

“Itac is the administrator of policy and therefore obliged to administer any other policy directive it may receive,” Snyman explains, noting that the issuance of export permits for metal is conducted in line with Section 6 of the International Trade Administration Act, 71 of 2002.

However, SAISI argues that an urgent resolution to the issues around the PPS should be found “as domestic consumers continue to remain subject to highly irregular scrap supplies, leading to seriously detrimental consequences”.

Edited by Creamer Media Reporter

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