Why is the government protecting foreign-owned ArcelorMittal SA?
The government is imposing stiff duties on imported, hot-rolled steel to the detriment of 10,000 local downstream steel manufacturers, writes Gerhard Papenfus
In a surprise move, the government has notified the World Trade Organisation that it intends to introduce a 12% safeguard duty on top of the existing 10% customs duty on imported, hot-rolled steel.
This decision is in direct conflict with the findings of the International Trade Administration Commission (Itac), a statutory body specifically tasked to investigate and advise the government on the impact of import duties on industries.
Itac recently published an "essential facts" letter in which it found the introduction of a safeguard duty was not in the public interest.
The question is why the government would decide to protect ArcelorMittal SA, a primarily foreign-owned entity, to the detriment of 10,000 South African downstream steel manufacturers and hundreds of thousands of employees. Several sub-questions need asking.
First, what was discussed during the meeting between the owner of Arcelor and the president, a meeting that caused a total turnaround in the government’s attitude towards a monopolistic Arcelor?
Second, what is the effect of Arcelor’s recent black-empowerment deal on current developments? How do the envisaged safeguard duties fit into the scheme of making Arcelor profitable, even with the burden of its new equity partners? And do the downstream entities have to pay for it?
During prosperous times when steel prices were high, and a lucrative import parity pricing arrangement was in place, instead of investing in a modern mill capable of producing high-quality steel at much cheaper prices, the owners of Arcelor took billions out of the country.
The effect of this is that Arcelor’s antiquated plant produces hot-rolled base steel at $550 a tonne while the world is trading at $460 a tonne. When the price of steel hit rock-bottom at $250 a tonne two years ago, many mills were in trouble globally. Currently, however, at $460 a tonne, modern mills have returned to profitability.
Old-technology mills also use 60% more electricity than modern ones.
These are only some of the factors that make it impossible for Arcelor to be profitable in a modern, global steel environment. However, instead of making itself more profitable, it is given government protection.
This arrangement ensures Arcelor does not need to adapt to what is globally dictated and what the steel downstream sector needs; this arrangement will dictate to the downstream sector how to adapt to the needs of a monopolistic Arcelor.
Let us acknowledge the argument of those who say that, unless Arcelor gets protection, it will have to close its steel mills. Our view is that this is a decision Arcelor will have to make. It has to adapt to the needs of the downstream sector, not the other way round. Arcelor has made the profits, now is the time to invest, not undertake patchwork to keep old plants alive, but build a new competitive plant. If this is not what they want to do, we suggest they cut their losses and close whatever is not profitable.
But, say the Arcelor loyalists, if Arcelor goes, China will dictate terms to our downstream sector.
Why is that? There are many competing steel mills in China, and who dictates that the downstream sector buy from China? There is the example of Vietnam, whose steel industry has grown many times since 2000. In the Vietnam scenario there was no dominant supplier but duty-free access to cheap raw material from the rest of the world. Why can’t we follow that example? Isn’t the fact that such an arrangement will hurt Arcelor the only excuse?
Let us make this very clear: the steel downstream sector does not only demand that the latest move to have safeguard duties introduced be withdrawn, we remain absolutely firm in our demand that the 10% customs duty also be scrapped — it does not help Arcelor and it only serves as a slow poison to the already struggling downstream sector, which cannot, and will not, accept a "steel capture" situation where all South Africans pay more for steel products to benefit Arcelor and a few individuals.
• Papenfus is CEO of the National Employers’ Association of SA