Will government scrap metal export tax plan?
03 July 2019 | Web Article Number: ME201915276
THE intentions and rationale behind the proposed introduction of an export tax on scrap metal may be contradictory to the greater wellbeing of the scrap metal sector.
That’s according to one of the biggest players in the sector, Macsteel, which is of the view that markets should not be regulated in favour of any one constituent party or sector over another.
The export tax was first mooted in 2013, but it gained renewed momentum with an announcement by Finance Minister Tito Mboweni in his 2019 budget speech in February that National Treasury would work with the Department of Trade and Industry and the Department of Economic Development to explore its introduction.
However, according to Mike Benfield, Macsteel’s CEO, market forces should be left to themselves to create equilibriums in supply and demand.
“There are too many unintended consequences created as a result of regulation, making support for any regulation impossible. It’s clear that efficient and cost-effective producers and supply chain participants need to emerge through a natural selection process rather than one which is forced or regulated.”
He said that the largest users of ferrous scrap in South Africa are the steel mills, more specifically long steel producers such as Scaw, Cape Gate, Unica, Fortune Steel and Veer Steel, with Pro-Roof (SA Steel Mills) due to come online shortly. After the mills, the next largest users are foundries.
Benfield said the pricing of scrap in South Africa is already controlled which has created a differential between scrap-based producers (electric arc steel makers) and the integrated producer, namely Arcelor Mittal South Africa.
The International Trade Administration Commission of South Africa (ITAC) currently controls the scrap price by setting the price at which scrap can be exported, based on the Rotterdam price at the time and taking our local exchange rate into account. This price is published on a monthly basis. Scrap merchants wanting to export are required to declare their achieved price to the market and give first right of refusal to the local market.
“Turkey is the largest scrap consumer in the world with several producers of merchant bar, very similar to the South African scrap mills scenario, and as a result, Turkey is regarded as a low-cost producing country. In comparison, South African merchant bar pricing is still US$140 to $150 cheaper per ton compared to that imported from Turkey. This translates to 23% below imported pricing and 13% below if the existing duties on imported steel were disregarded.”
Benfield said this gap in pricing has been made possible due to the existing control over scrap pricing.
“We believe that the scrap price will drop further should an additional duty or tax be imposed on the export of scrap, as the export price (including any additional duty/tax) will need to be matched to the international price. This will force scrap producers to sell locally at better pricing than they would be able to achieve on the international market.”
This, he added, has several implications. Firstly, scrap producers will be less profitable in an already depressed sector within a troubled economy.
Secondly, their primary products will be more expensive (owing to the scrap by-product being less valuable) yet South Africa depends on these manufactured products to be competitive internationally and being less competitive will have negative consequences: the simple economics of this means the industrial engine, upon which our country is so reliant to employ as many people as possible, will falter.
Thirdly, the imposition of a tax on scrap is a contradictory policy: more steel will be produced from scrap which will have negative consequences on the producers of primary steel from iron ore. This may have negative consequences to Arcelor Mittal, the only producer of this kind in South Africa, and which is already protected by government.
Fourth, certain steel produced from scrap in this country is of inferior quality to that produced from iron ore. High-quality steel will become more expensive as it may need to be imported if primary steel producers find themselves in more difficulty, resulting in goods produced in South Africa from high-quality steels becoming more expensive.
Benfield said decision makers also need to ask if cheaper scrap is going to result in cheaper steel into the local market, benefitting the downstream customer or end-product producer. “Possibly, but there is no guarantee that the benefit of cheaper steel will be passed onto the downstream customer – there is a high risk that the benefits will be retained.”
He said end users of steel (whether sourced from scrap re-melters or primary producers) which don’t produce scrap in their own processes need to be competitive and a lower scrap price may lead to this segment of the sector being more competitive.
Benfield also argued that middle-men or merchants who facilitate the efficient supply chain of the sector will be impacted by lower pricing (margins are earned off higher cost bases) but the focus here should rather be on the steel end-user.
“On this basis Macsteel believes that all regulation or support should be directed towards the end-user and downstream economy to ensure that goods and services produced for export out of South Africa are as competitive as possible, from both quality and price perspectives.”