Import prices on steel not the best solution

1st July 2016

By: Robyn Wilkinson

Features Reporter

  

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International trade credit insurer Coface credit analyst Kyle Mason says that government would do better to provide benefits for local entities using locally produced steel than to further impose import and antidumping tariffs.

“These tariffs ultimately only benefit the producer segment of the steel market, while downstream manufacturers and end-users have to absorb the increased costs of steel, adding even more pricing pressure to the already fragile infrastructure, automotive and construction sectors,” he explains.

Owing to this, Mason advises that government consider encouraging local manufacturers and businesses to use local steel products by offering rebates and incentives, as Africa’s largest steel producer, ArcelorMittal South Africa (AMSA), has done by designing and implementing a number of direct and indirect initiatives, such as value-added export rebates, to support and develop the downstream manufacturing industry.

He further suggests that government consider providing a preferential procurement benefit, where local entities using locally produced steel record their input costs at a rate higher than the actual cost and thereby derive a tax benefit. This, he maintains, would be better than forcing these businesses to buy local steel through the use of tariffs, which will only increase input costs for a manufacturing sector that is already under strain.

“The South African steel industry has always been prone to volatility and 2016 is proving to be another difficult year. This is due to a variety of challenges that have created what can only be described as the perfect storm. The challenges include an increase in cheaper Chinese steel imports as China’s steel producers ramp up exports to emerging markets, owing to the substantial slowdown in Chinese demand,” he says.

Mason explains that Chinese producers have a significant advantage over local producers, as they are able to sell at lower prices than their production cost, owing to government subsidies. This strategy has allowed Chinese producers to aggressively target and gain market share in regions such as sub-Saharan Africa, where South African producers previously dominated.

The weak investment environment, turbulent financial markets and geopolitical conflicts in many developing regions, combined with the deceleration of the Chinese economy, have led to a massive oversupply of steel globally. This has resulted in considerable downward pressure and a steady decline in global steel prices over the past four years.

In August last year, the South African trade authorities deliberated on and imposed a 10% tariff on imported steel, leading to local stakeholders, including the National Union of Metalworkers of South Africa, the South African Iron and Steel Institute and AMSA, subsequently calling for further commitment from government. This included anti-dumping regulations, a ban on the export of scrap metal and a commitment that State-owned enterprises would procure local steel.

Mason, however, maintains that, while the 10% import tariff may have provided some short-term relief, it is not a viable long-term solution. He explains that, while it was understood that the imposition of these tariffs was conditional on domestic mills not increasing the price of locally produced steel, the tariff is unlikely to be enough to dissuade local businesses from buying and using significantly cheaper Chinese imports.

“This means that all the local trade authority has managed to do is raise the costs of imports, thereby raising input costs for local businesses, and, ultimately, raising the price of goods for end consumers,” he comments.

A further rise in input costs is particularly problematic in South Africa, where other factors have already made it difficult for many steel manufacturers to remain profitable. Mason outlines how, between 2007 and 2014, AMSA’s cost per ton from the Sishen iron-ore mine, located in Kathu, in the Northern Cape, rose significantly as a result of the unwinding of past agreements, greatly affecting the local steel sector with raw materials accounting for about 46% of the input cost of steel production.

In addition, local producers have had to contend with sharp increases in electricity tariffs, electricity interruptions, unexpectedly high wage inflation, and an 8% hike in rail costs. As a result of this, while the cost of the raw materials basket for flat and long steel products fell 43.7% and 26.2% respectively for international producers between 2008 and 2015, the same raw materials basket increased by 1.1% and 4% respectively for South African producers.

Moreover, Mason adds that the expected implementation of a carbon tax in South Africa on January 1, 2017, may prove to be a bridge too far for some South African producers. These additional costs, he suggests, could make South Africa an even less attractive destination for investment by international steel firms and render local producers less competitive in the international market. “Local producers won’t be able to pass the additional costs on to consumers, as the steel industry is a price taker that depends on global steel prices.”

Despite the current challenges in the steel market, Mason notes that the World Steel Association has forecast a 3.8% increase in steel demand in Africa for 2016, and a further 6.5% increase in 2017.

He notes that steel demand is inextricably linked to economic growth and urbanisation, and says that it will thus increase as the need arises for new infrastructure, improved connectivity, efficient use of natural resources, and creation of sophisticated transport hubs on the continent. However, he notes that, unfortunately, Africa’s steel demand accounts for only 2.9% of the total global demand, making it unlikely that these increases will have any real effect on prices.

Edited by Zandile Mavuso
Creamer Media Senior Deputy Editor: Features

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