DONALD MACKAY: Export duties on scrap: the winners and losers

When SA’s electric steel producers (mini-mills) say the tax on scrap metal destined for export means local scrap is available and affordable and enables them “to create finished products in line with government policies to enhance local industrialisation and beneficiation”, it’s not clear how this happens (“Steel firms fight Amsa’s call to end scrap export tax,” October 30).

The mini-mills are supported through two main mechanisms. The first is the price preference system (PPS), which forces metal recyclers to sell to domestic consumers at 30% below the global price for steel and 10%-25% below for most other metals. If they refuse, they cannot get an export permit.

The scrap consumers receive about R8.5bn per year in value transfers through PPS, so hardly small change. Who forfeits this R8.5bn? Mainly state-owned enterprises, manufacturers such as the distressed Nampak, and thousands of small factories making pipes, burglar bars and other fabricated products. Of course, the 350,000 waste pickers and staff in the recycling industry also earn less.

Because the export duties are only paid on scrap metal that the mini-mills don’t want to buy, they have no effect on the industry. After all, if they wanted the scrap they could simply buy it at the heavily discounted PPS price. The fact that an export permit has been issued means no-one here wanted to buy the scrap. In the last 12 months the scrap recyclers paid the SA Revenue Service (Sars) R437m for exported scrap metal no-one wanted locally. I think it’s fair to say this is the ultimate unearned rent. Who funds this? The same people again, who earn less for their scrap. Who benefits? Only the taxman.

The mini-mills receive friendly finance from the Industrial Development Corporation (IDC), the second support mechanism. It’s not a stretch to say the IDC is over-invested in the sector. Former trade, industry & competition minister Ebrahim Patel put its exposure (debt and equity) to mini-mills, which supply about 20% of the market, at R14bn. ArcelorMittal SA (Amsa), which supplies 50% of the steel in SA, has a market cap of R1.5bn. The other 30% is imported.

Of that R14bn investment from the IDC, R2bn is invested in companies currently in business rescue (14% of its investment into the sector). I appreciate that the IDC has a different mandate to commercial banks, but when 14% of your investment in a given sector is under water, I’d be suspicious of how those investment decisions were made. Mini-mills account for two-thirds of all the companies in business rescue at the IDC. That is a staggering number and should be setting off alarm bells all over the bank.

Amsa is struggling to compete against steel from China, but the mini-mills, with their enormous subsides, are selling locally at Chinese prices. What do we expect to happen? If the export duty remains and Amsa closes Newcastle, which seems inevitable, what would have been accomplished by retaining the export duties? The mini-mills will still buy the same quantity of scrap as before. Sars will collect the same amount of money, but many people in Newcastle will be without work.

The export duty is the focus of the mini-mills in their media releases, but PPS, which already siphons billions from the productive part of the economy into the pockets of a few companies, needs to be looked at too. The International Trade Administration Commission of SA is doing exactly that, which is encouraging.

On top of the 30% PPS discount, scrap sellers may not charge the buyers for transport, no matter how far they are from the buyer. One buyer told its clients that if there is any problem with the delivered material “a handling, offloading and weighbridge fee of R1,000/mt will be payable prior to the truck leaving the premises”.

I doubt any of the mini-mills will provide data on how the export tax benefits them (consider this question now asked), but I would welcome a cogent argument on how they could possibly benefit from the tax when it is only paid on products they have refused to buy. Export duties were meant to replace PPS, not be added to it.

Many of the companies noted in the article mentioned above lobbied for export duties to be added to PPS, even on non-ferrous metals they are not involved with, just before PPS was due to be replaced. It’s not at all clear how this passed muster and ended up in law, but it did.

Let’s get rid of the export duties on scrap metal. No mini-mills will be harmed in the removal of this pointless tax and jobs might even be saved.

• MacKay is CEO of XA Global Trade Advisors.