Steel crisis spurs state into action
The government is throwing its considerable weight behind tariff protections for the very same steelmaking monopoly it has for years accused of unfair pricing practices that have harmed the local manufacturing sector.
ArcelorMittal South Africa accounts for 70% of South Africa’s steel production. It has routinely been accused of abusing its monopoly, particularly in practising import parity pricing – when locally produced steel is priced as if it had incurred all the costs of coming from abroad. But now that the world is in oversupply and steel’s price has fallen, import parity has been no help for ArcelorMittal, which reported a R227-million loss last year.
It has turned to the government for help and asked the International Trade Administration Commission for a maximum 10% import tariff to be introduced on steel products to protect the local industry from the effects of cheap imports.
The department of trade and industry has for years pushed for fairer pricing for local steel, which it says has suppressed the growth of South Africa’s manufacturing industry. But it supports the imposition of import tariffs and will even consider applying for antidumping duties.
The steelmaker’s pain is shared worldwide as the slowdown in growth in China has seen steel production surpass demand, causing a global oversupply.
In the first half of 2014, subsidies accounted for four-fifths of the profits reported by Chinese steel companies; it is believed steel product exports are being sold well below the cost of production, Reuters reported.
In a policy paper published by the Organisation for Economic Co-operation and Development (OECD) in January, it was said that the global steel industry’s capacity to produce steel has more than doubled since the early 2000s.
With investment projects continuing to increase, global nominal steelmaking capacity is projected to increase to 2.36-billion tonnes by 2017, up from 2.16-billion tonnes in 2013.
This month, India raised import duties on steel products and in Iran, the United States and Mexico, steelmakers are also calling for import tariffs for Chinese steel in order to protect its local producers. Under World Trade Organisation rules, South Africa could raise the effective import tariff on steel products from 0% to 10% to give import protection to steel producers.
Henk Langenhoven, chief economist at the Steel and Engineering Industries Federation of Southern Africa, says steelmakers aren’t helped by suppression in the domestic market for steel. The domestic market typically consumes 50% of what the local metals and engineering sectors produce.
“Domestically we’re … dependent on mining, automotive manufacturing and construction,” he said.
Feeling the pinch
Both mining and construction have been feeling the pinch. Although the automotive sector has performed well, one of its key export markets is China, where recent data showed declining new car sales for the first time in two years.
Furthermore, companies importing components are now unable to make them for less than it costs to import them, he said, noting the amount of imported intermediary inputs in local manufacturing had jumped from 25% in 1995 to 37% last year.
Garth Strachan, a deputy director general at the trade and industry department, said the significant change in factors surrounding steel production cannot be ignored. Losing South Africa’s industrial capabilities in steel would have very serious implications for economic growth, he said.
“We have to take into account there is a very unfavourable set of circumstances arising from an oversupply and glut of steel, and very significant steel penetration into our market. In these circumstances, we would look favourably on taking measures to support steel producers through a range of policy measures, one of which would be to increase the tariff from zero to the bound rate of 10% to provide some tariff protection – in keeping with what has happened in other jurisdictions.”
Strachan said the department is even amenable to antidumping measures to protect the industry. But “our willingness to consider support for steel should not be construed as a blank cheque to hide behind tariff protection and return to any form of abuse of market power”, he warned.
ArcelorMittal, which was previously the state-owned entity Iscor, “had a great deal of vertical integration over most of its life until the early millennium”, said Peter Major, mining analyst at Cadiz Corporate Solutions. “The state invested billions in it over 70 years; when Iscor was properly operating, its overall cost of production could rival better than three-quarters of the producers on the planet,” said Major.
“This company was almost fully integrated from top to bottom. It had and could make almost everything. But then it was broken up and sold off at the start of the greatest commodity boom the world has ever seen.”
ArcelorMittal chief executive Lakshmi Mittal bought the company cheaply at the bottom of a 20-year commodity downturn and with it secured a contract to get iron ore out of Kumba on a cost-plus basis and low electricity rates. “Yet he passed little of that benefit on to South Africa,” said Major. “But if you turn over a purely local South African, formerly parastatal behemoth to a totally capitalistic, totally foreign-owned, opportunistic, internationally listed company with no history of operating in South Africa at all – then what do you expect?”
In 2007 Harmony Gold won a prominent case of excessive steel pricing by Mittal SA (as it was then called) it had brought to the Competition Tribunal. Harmony argued import parity was not a competitive price in the South African market and that Mittal had charged as much as 63% less for exports as it did locally. In the same year, the import tariff on steel products was in effect reduced to zero. Reducing a tariff to zero is a tool governments can use to counter import parity pricing or abuse of monopoly pricing. As recently as November last year, a parliamentary portfolio committee recommended measures be taken to counter import parity pricing used by both ArcelorMittal and Sasol.
In his budget speech in May, Minister of Economic Development Ebrahim Patel announced the establishment of an independent panel made up of steel industry experts to advise on a more competitive steel price for downstream users. He said the panel would seek to stimulate local demand for steel too, but made it clear that companies requesting tariff support would be required to make “reciprocal commitments”.
The Sunday Times reported that ArcelorMittal is considering selling a stake as part of an empowerment deal in return for government help.
Today, ArcelorMittal is a relatively high-cost steel producer with little vertical integration, operating in a country that uses less steel each year, said Major. “Iscor today is a couple of steel plants with almost no control over any of their input costs. Where is their competitive edge? … You’re not going to stimulate demand for steel by raising tariffs. You might even kill it a little more.”
The OECD’s policy paper said government interventions contribute to global excess capacity: “In competitive economies, it is the responsibility of steel companies … to identify ways to adapt to changing market conditions … Governments should allow market mechanisms to work properly and avoid measures that artificially support steelmaking capacity.”
Strachan, however, said OECD countries have intervened repeatedly to protect their own industrial capabilities, such as the massive bailout of automotive companies in the US following the 2008 crisis. “Our industrial policy rests on the principle that we should intervene to support reindustrialisation and to secure any growth key sectors, including the steel sector,” he said.
Major said the mining industry in South Africa, with the richest gold and platinum deposits in the world, had created hundreds of thousands of jobs without government assistance. “Yet today the government seems keen to destroy those traditional high-manpower requirement industries where we had a real edge in the world – and subsidise industries we are not competitive in.”
Martin Cameron, an economist and lecturer at North West University, said while there isn’t enough demand to stimulate the steel industry, it is not a given that the local industry could deliver on specific product lines.
Langenhoven said the industry’s last significant investment in production capacity goes back to 1995.
Even if tariff protection is provided, it doesn’t mean the local industry will be able to supply the demand when it arises, Cameron said. “Short term you maybe can’t get all those products you need, and so you have to import at a premium.”
He warned that the collapse of the local steel industry would mean South Africa would have to outsource strategic infrastructure to other economies.
The challenge with “antidumping duties is it take years to get it in place, then damage has been done”, Cameron said. “A tariff increase would be speedier; you don’t really need to consult other countries.”
New steel mill
The OECD paper says a new steel mill project in South Africa will add to the glut. The China state-owned Hebei Iron & Steel, the China-Africa Development Fund and South Africa’s Industrial Development Corporation (IDC) have signed a memorandum of understanding to develop the R45-billion project. It will be China’s largest steel mill outside the Chinese mainland, the Wall Street Journal said. The IDC said it is still busy with feasibility studies.
“In the domestic market context, we don’t have demand to merit the supply we want to create,” said Cameron. “But we need to be thinking around the exporting of steel and regional integration.”
ArcelorMittal chief executive Paul O’Flaherty last year reportedly said the company was not in a position to change its pricing model until the company became profitable.