Can South Africa survive without Amsa?

Last month, ArcelorMittal SA (Amsa) applied for a 51% duty on certain flat-rolled steel products imported from China. This comes on top of the 10% duty already in place, meaning importers may soon pay a 61% premium for products from China.

Should government grant this increase, the costs will be borne across the economy – from mining to construction and downstream beneficiation.

Amsa’s troubles are not entirely of its own making.

Its electricity costs have spiralled more than 835% over the past decade, sucking the oxygen out of its lungs as Chinese producers flooded the local market with cheap product.

Chinese competitors have the benefit of government subsidies and state-regulated tariffs, meaning their electricity costs have virtually flatlined for the last five years.

Given odds like this, it’s a wonder Amsa has survived so long.

In November it ceased long steel production at its Newcastle plant, having exhausted a R1.683 billion from the Industrial Development Corporation (IDC) that was intended to delay the announced wind-down of long steel production at its Newcastle and Vereeniging plants due to unsustainable energy and logistics costs, cheap imports from China, and inadequate policy support. Newcastle is now under care and maintenance.

In a recent newsletter to members, chief executive of the National Employers’ Association of South Africa (Neasa), Gerhard Papenfus, asks whether it is worth saving Amsa and sacrificing downstream steel producers that rely on its products?

ALSO READ: ArcelorMittal ceases production at Newcastle, still no rescue in sight

Interventions

SA trade policy is managed by the International Trade Administration Commission (Itac), which is currently in the throes of the largest review of steel tariff policy in its history.

Government seems determined to keep Amsa afloat through whatever means at its disposal: financial assistance, trade policy, import tariffs and soothing words.

Not everyone believes it should survive on the taxpayers’ dime.

Itac, at Amsa’s request, “is persistently expanding and increasing its web of import duties on raw materials to protect Amsa, which, mainly due to it being such an antiquated mill, is a high-cost producer that cannot compete with international modern mills without government intervention” says Papenfus.

So long as Itac acquiesces to Amsa’s repeated requests for protectionist duties, consumers will be asked to foot the bill.

The domestic steel sector will continue to shrink around the protectionist moat being built for Amsa so that we can proudly fly the SA flag and claim to have a domestic primary steel producer.

Some have accused Itac of taking a shotgun approach to steel, swaddling the market with tariffs to protect Amsa to the point of slapping tariffs on goods not produced, or produced at a far higher price, by Amsa and Safal Steel.

ALSO READ: ArcelorMittal warns it might close without urgent solution to challenges

If we surrender our market?

If SA is to sacrifice Amsa and surrender its market to cheap Chinese steel, would that be a bad outcome?

Consumers would be able to purchase steel at international prices, which may then lead to the closure of Amsa’s remaining flat steel production.

We would, in effect, receive the benefits of low Chinese energy costs and state subsidies.

The downside is that SA would be forced to import most of its steel.

That would hurt the trade balance and threaten 3 500 jobs. SA has installed steel production capacity of 10 million tonnes (Mt), with annual consumption of 4.4Mt – of which just 2.8Mt is produced locally.

There could be some streamlining of these facilities to achieve better efficiencies, but until the country can offer internationally competitive electricity and transport tariffs, which is not on the cards for the foreseeable future, Chinese imports will fill the gap.

SA appears to have survived the closure of the Amsa long steel plants in Newcastle and Vereeniging, showing an ability to adapt to adversity.

In its defence, Amsa issued a statement last year outlining strategic alternatives to avert plant closures and job losses.

ALSO READ: ArcelorMittal hauls Transnet to Competition Tribunal for market abuse

It points to numerous other countries, such as the US, the EU, UK, India, Canada and Brazil, that had introduced measures to protect their local steel sectors. These included safeguard duties, anti-dumping measures, and tariff-rate quotas aimed at curbing import surges, mainly from China.

The closure of Amsa’s flat steel production at Vanderbijlpark is probably inevitable, adds Papenfus, and the sooner that day arrives, the better.

From that moment on, the steel industry will have access to steel at competitive prices.

The reality is that fiddling with steel tariff policy has not arrested SA’s deindustrialisation.

More than 1 000 steel-dependent businesses have closed over the last five years with the loss of 110 000 jobs. Weigh that against the 3 500 government hopes to save by keeping Amsa alive.

There was a time when SA exported to sub-Saharan Africa but that market has been swallowed whole by China. There’s no turning back the clock.

ALSO READ: ArcelorMittal SA’s perfect storm of woes

Conflicting interests

SA’s steel policy is marinated in conflicting interests.

The IDC is massively invested in so-called mini mills, which use scrap metal as feedstock and compete with Amsa in some products. These mills enjoy a substantial pricing advantage through the Preferential Pricing System (PPS), which allows them to secure scrap at 30-50% discounts to market prices.

This is in effect a ban on scrap exports and a R8.5 billion annual subsidy to mini mills – resulting in an estimated 50 000 scrap collectors in SA being forced out of business, according to XA Global Trade Advisors.

The mini mills would happily take on some of the spare capacity vacated by Amsa, but could not handle some of the speciality grades required by the automotive industry and others.

ALSO READ: Almighty scrap breaks out between steel rivals as ArcelorMittal winds down

History repeats

Amsa’s antecedent, Iscor, was a creature of state planning.

Founded in 1928 to promote industrialisation and reduce dependence on imports, it was also a vehicle for solving the “poor white problem” that existed in the depression years.

Many of the same motivations for its establishment by the then Pact government (a kind of government of national unity between the National and Labour parties) are now being trotted out today using eerily similar shibboleths such as job protection, beneficiation and economic stimulus.

Without cheap power and logistics, those motivations no longer hold true. Solving Amsa’s problems requires credible fixes at Eskom and Transnet. Those are beginning to show slender shoots of recovery, but nowhere near enough to beat off the Chinese.

This article was republished from Moneyweb. Read the original here.