Mini mills are private companies that receive ‘billions in bailouts each year’ and do not produce all the products SA needs, which will now have to be imported. Picture: iStock
Extensive cheap funding by the Industrial Development Corporation (IDC) – a government entity – is one of the key mechanisms used for state protection of South Africa’s mini mills, which produce steel products from scrap metal.
This results in overcapacity to the detriment of the rest of the steel industry, including ArcelorMittal South Africa (Amsa).
This is clear from a report published by XA Global Trade Advisors (Xagta) – XA’s Scrap Metal Report No 2 – in December.
That was just weeks before Amsa announced the closure of its long-steel operations in Newcastle and Vereeniging, as well as its rail and structural subsidiary Amras.
Amsa, which produces steel from iron ore, said the closures will affect 3 500 jobs directly and indirectly.
“The broader economic effect on induced jobs is expected to be significantly higher, especially in the Newcastle region,” it stated.
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Xagta explains that there are three incentives used by government to drive up the demand for scrap metal:
Despite rising demand, the price of scrap metal is kept low artificially by, for example, placing the transport cost and risk on the seller, which further benefits the mini mill.
“The combination of forced discounts on raw material prices combined with preferential finance from the IDC makes entering the market less risky and so more players arrive.”
Xagta estimates that approximately R8.5 billion per year is transferred in value from the steel scrap generators (resellers) to the steel scrap metal consumers (mini mills).
While consumers of the subsidised scrap metal benefit from lower prices, it is to the detriment of the sellers of the scrap metal – which include struggling state-owned entities (SOEs) like Transnet and competitors of mini mills, including Amsa.
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“Amsa [is] struggling to compete with imports from China, which are 56% more expensive than the rebar produced by the mini-mills,” says Xagta.
“The subsidised rebar is going to affect the most expensive offerings in the market first [Amsa], not the next cheapest [China].”
It must further be noted that the mini mills do not produce the full range of Amsa products, and these will have to be imported from 31 January, when the affected Amsa plants stop production.
“It doesn’t matter how well they negotiate for better prices on iron ore or electricity or get the unions to agree to no increase [which Amsa did], it doesn’t overcome the enormous wave of cash washing over the other side of the industry.”
The IDC is the largest funder of the scrap metal industry, to the tune of about R14 billion. Policy-driven funding like this, according to Xagta, “should not extend to over capitalising a whole sector and placing the complete steel market at risk”.
It says: “The mini mills industry, which South African factories, mines, SOEs and construction companies pour billions into each year, is the very definition of an industry with no comparative advantage.
“No matter how much money they are given, they will always need more. These are private sector companies receiving billions in bail-outs each year.”
According to Xagta, a significant portion of the IDC’s scrap metal book (R2 billion) is currently under business rescue despite the heavy support – and the market distortion is massive due to the over-investment in mini mills:
“The decision to subsidise the mini mills is an inadvertent decision to close parts of Amsa, even if that was never the intention.”
Xagta points out that the IDC’s R14 billion is only supporting around 3 000 jobs (R4.6 million per job per annum).
“Or if we only measure the R8.5 billion PPS subsidy, then around R2.8 million per job, about 8 times as much as the automotive industry receives in subsidy per job and 60 times as much as clothing manufacturers, a labour-intensive sector, receives per job.
“If the strategy is about the production of cheap steel, then it’s working, but at the cost of the rest of the steel sector and at the cost of the upstream generators of scrap metal.”
Xagta quotes the requirements for industrial policy as set out by Professor Dani Rodrik, a member of President Cyril Ramaphosa’s Economic Advisory Council:
None of these apply in general to the mini mills.
“The oversupply of capacity is not natural or necessary. It is a direct outcome of a heavy-handed intervention into a market where South Africa clearly has no comparative advantage,” Xagta says.
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The International Trade Administration Commission of South Africa (Itac) is currently reviewing the PPS, which was first instituted in 2013. Itac was party to the proposal in 2020 to replace it with export duties.
In the end, however, the export duties were instituted – in addition to the PPS.
“The coexistence of the PPS and export duties has created a double burden for genuine scrap generators such as manufacturers, construction companies, mines, and state-owned enterprises, as well as waste pickers and recyclers,” says Xagta.
The Department of Trade, Industry and Competition (dtic), which coincidently the IDC falls under, noted its concern about the Amsa announcement and said it “remains committed to working with Amsa to find a workable and lasting situation”.
Based on the Xagta report, the dtic will be well-placed to review not only the PPS, but the totality of government intervention in the steel sector – including the preferential funding provided by the IDC and its unintended consequences.
This article was republished from Moneyweb. Read the original here.
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