The Chinese have a reputation for being efficient and cost-competitive, but manufacturing a stainless steel sink and exporting it for a fraction more of the price of the raw material seems impossible.
This was the predicament in which global stainless steel sink manufacturer Franke Kitchen Systems found itself while competing in South Africa over the past five years.
The stainless steel used to manufacture the sinks is traded at R27 to R28 a kilogram internationally, according to Franke Kitchen Systems South Africa managing director Alan Palmer. However, he points out that manufacturers based in China, Malaysia and Turkey are exporting stainless steel sinks to South Africa at R30.70/kg, which means it costs them a mere R2.70 per kilo to manufacture and export each sink.
As a result, Franke’s market share in South Africa has dropped from 63% in 2008 to 43% in 2010. Palmer said that between 2009 and 2011 stainless steel sink imports in South Africa increased by 146%.
Franke lodged an application with the International Trade Administration Commission of South Africa (ITAC) to get the import duty on stainless steel sinks raised.
Last Friday its application was successful and the commission announced that it was raising the import duty from 20% to 30%. The move sets the import duty at the maximum rate allowed by South Africa’s binding commitments on tariffs for industrial and agricultural goods.
“The commission found that additional tariff support for the domestic industry manufacturing stainless steel sinks would improve the price-competitive position of the industry in the face of fierce low-priced competition from abroad,” said the commission’s statement, which was released last week.
Franke is said to have invested about R84-million in South Africa and employs 242 people.
The announcement has sparked varying responses. Some analysts, who spoke to the Mail & Guardian on condition of anonymity, said the increase in duty was treating the symptom and not the root cause, which was excessive stainless steel pricing in South Africa. “There is a real need to deal with the underlying factors that affect competitiveness,” said one analyst, referring to local stainless steel prices.
The analyst pointed out that South Africa’s dominant stainless steel producer, Columbus Stainless, used the import parity pricing model, had a near monopoly and exported large quantities of its product.
He drew comparisons with ArcelorMittal South Africa and Sasol in the steel and polymers industries, where pricing strategies were seen to have a massive impact on the country’s ability to grow manufacturing capacity and create jobs. “If the government can’t win the fight over polymers and steel, it’s not going to win the fight against Columbus.”
Columbus has denied the allegation that it is excessively pricing its stainless steel (see “Columbus Stainless responds”).
Others argued that the move would force South African consumers to pay more for their stainless steel sinks because of the government’s move to protect local manufacturing capacity. “This is about finding the weakest link,” said one analyst. “And the weakest link appears to be the consumer.”
Franke is obviously pleased as punch and Palmer was quick to dismiss allegations that Columbus was profiteering. He said Franke operated in 43 countries and had 16 manufacturing plants. “We buy stainless steel around the world and the pricing in South Africa is comparable.”
A stainless steel sink sector stakeholder, who agreed to talk on condition of anonymity, said some countries had subsidies for exporting sinks and he believed the international manufacturers were trading on these subsidies. In some cases these subsidies were as high as 18%.
Unreasonable price increases
Palmer said Franke did not regard this as an opportunity to raise prices. “We are well aware that we have to be extremely competitive. This is not a luxury for us.”
He added that the company “had to do something before we became an importer”.
The commission’s chief commissioner, Siyabulela Tsengiwe, said the decision to raise the import duty was taken after looking at the cheap prices at which sinks were being imported to South Africa.
But he also said that the commission had not looked into how the international manufacturers were getting stainless steel sinks into the country at such cheap prices.
The commission was not expecting unreasonable price increases from local manufacturers as a result of the import duty increase, but he stressed that, if there were increases, they needed to be weighed against the benefits of job creation and boosting the economy.
The department of trade and industry’s spokesperson, Sidwell Medupe, supported the commission’s decision to increase tariffs on stainless steel sinks.
The department was “concerned” about the pricing structure along the stainless steel value chain, particularly the impact it was having on downstream activities. “We are engaging with the local industry and are considering options within our industrial policy instruments to address the matter,” said Medupe.
Columbus Stainless responds
“This is obviously a very sensitive issue and more complex than seen on face value,” said Columbus Stainless general manager Bertus Griesel. “Columbus is the only flat-rolled stainless steel producer in South Africa and also in Africa and attempts to make sure that the stainless steel industry in our country is healthy. This is not done by asking extravagant prices, because the industry would not be in a position to accommodate this.
“The question on import parity pricing is interesting and I would like to explain the pricing policy at Columbus. A variable pricing model is used based on the costs of production in that there is a fixed price component developed many years ago. There is then a variable portion added to the base price that changes with the movements in raw material prices on a monthly basis, called the alloy surcharge.
“Our largest competitors, such as China, have a well-protected stainless steel industry. China has a number of government support programmes that allow our competitors (primary stainless steel producers) and also the competitors to the South African manufacturers, such as the sinks manufacturers, to manufacture the components very cheaply and compete on the export markets with export rebates … In South Africa exchange rates are not controlled and we do not have export rebates or import duties to assist the South African businesses. Many competitor countries have this assistance from their governments.
“These factors have a huge impact on the sales prices of imports into South Africa, as well as exports from South Africa.
“The decision of the International Trade Administration Commission is welcomed, as this is a step in the right direction to not only save current job opportunities, but also create new ones in South Africa.”