LETTER: Mini-mills are the future of SA steel

In his latest article in Business Day, trade adviser Donald MacKay asked twice how mini-mills — steel producers that use scrap metal as a raw material — benefit from the export tax on scrap (“Export duties on scrap: the winners and losers”, October 31). He suggests they do not benefit at all. As chair of such a mill, Cape Gate, I will gladly answer his question.

MacKay suggests that another government intervention, the price preference system (PPS), which is supposed to ensure steel is available at a 30% discount to international prices locally, “needs to be looked at too”, and welcomes the International Trade Administration Commission’s (Itac) review of the system. I agree. The PPS is not working as it should; it is ineffective and Cape Gate has continuously engaged with Itac on the issues.

In contrast, the export tax on scrap does work. The so-called mini-mills benefit from the export tax on scrap metal because it ensures affordable quality scrap metal is available for purchase by domestic consumers in SA. Mini-mills, which provide more than 5,000 jobs and make long steel products in a more environmentally friendly process than steel producer ArcelorMittal SA, rely on access to scrap steel as an input. Affordable prices for the ferrous scrap enable them to produce finished steel products at a price that is viable for export.

Steel mills need to produce high volumes to remain viable, and given SA’s limited domestic market for steel products exports are crucial to their survival. Without the correct export tax on scrap metal, input costs would be too high to make new steel products at a competitive export price and many mills would close, decimating jobs.

In a recent podcast MacKay highlighted the importance of supporting steel exports as a way to maintain the local industry’s competitiveness. I wholeheartedly agree. Steel exports are necessary to retain local manufacturing capability. Furthermore, it is illogical and counterproductive to allow the unfettered export of an internationally sought-after raw material — scrap steel — rather than encouraging the beneficiation of it into a finished steel product, thereby protecting thousands of jobs and local industrialisation.

It is for this reason that the export tax is required: to allow the mini-mills to have a lower cost of business so their products are priced well enough for export — the very thing McKay says he supports. 

The crux of the steel issue, which is likely to dominate headlines in the near future, is local oversupply of steel, with more steel production capacity than the SA economy can absorb and challenges in exporting surplus production cost-effectively due to global oversupply. With an increase in demand unlikely, the solution to the crisis facing the long product sector is either to assist exports or to rationalise capacity.

It is also worth noting that the low domestic prices for long steel products are not due to the mini-mills or the scrap tax, which MacKay blames, but is a typical case of supply and demand. There is too much local supply without a viable market for finished products, and this drives down the price of long steel products to below international prices.

As the government and the industry grapple with an oversupplied steel sector and weak local demand, they must not prioritise saving the older, heavily polluting and poorly structured Amsa above all else, but rather look at saving as much of the whole steel market as possible. What is lacking in MacKay’s analysis is an acknowledgment that ArcelorMittal already benefits from government support for its flat steel business, which is in effect a monopoly, yet still struggles to turn a profit.

Amsa should not be saved at the expense of the rest of the long steel industry. Mini-mills have a crucial role to play in the industry, and with assistance could play an even more important role in future. Removing the scrap tax and endangering the mini-mills is simply the wrong choice. 

Oren Kaplan
Chairman, Cape Gate

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