The government’s industrial policy interventions in the steel market, and particularly the scrap metal market, may have had noble intentions, but they resulted in unintended and even unfavourable consequences.
The noble intention was to ensure sufficient and affordable scrap metal for local steel manufacturers such as ArcelorMittal South Africa (Amsa) and the growing number of mini-mills.
The thinking was that cheaper, locally produced steel would boost economic activity in key sectors such as mining, manufacturing and construction, and at state-owned enterprises (SOEs) such as Transnet.
Unfortunately, economic growth has averaged 2.35% since 1994. The South African Iron & Steel Institute (Saisi) reported in November last year that the contraction in construction activity posed a significant challenge to the steel industry.
The real value of building plans passed dropped by 11.1% (R6.68bn) between January and September last year. Manufacturing production declined, and domestic vehicle export sales fell 42.6%, potentially reducing the demand for locally produced steel.
From January to October 2024, South Africa produced 4.063Mt of crude steel, reflecting a 1.1% decline against the same period in 2023.
According to Saisi, this output marks a concerning 29.3% decrease from the 2018 production level of 5.747Mt. Once the largest producer of steel in Africa, South Africa is now in third position after Egypt and Algeria. In 2023 it was still in second place.
The scrap metal industry in South Africa is worth between R15bn and R20bn a year, with 2.5Mt-3Mt of scrap metal recycled annually. To increase local steel manufacturing, there had to be enough scrap metal at affordable prices.
The plethora of interventions included a price preference system (PPS), a temporary ban on ferrous and nonferrous metal exports, and the introduction of export duties and “policy-driven financing” by the Industrial Development Corp (IDC) for mini-mills.
The demand grew — but not the supply. The main sources of scrap metal are also the main users of steel, including SOEs, manufacturing, construction and mining.
XA Global Trade Advisors CEO Donald Mackay sets out the effect of these interventions in the company’s second scrap metal report, “Introduction to Trickle-up Economics”.
“In a normal market, when demand increases but supply remains static, prices rise. As prices rise, more people will enter the market to supply the service or product.” However, in South Africa, the price controls around scrap muted that important signal. “To overcome this problem, the scrap consumers lobby the government for rule changes to make it harder to export scrap metal and thus remove competition and increase supply to them at modest prices.”
PPS was implemented in 2013 to regulate the export of ferrous and nonferrous scrap metals. The system applies different discounts for various grades of scrap metal, ranging between 10% and 30%.
If the price of scrap metal on the international market exceeds the locally adjusted price, exporters must offer the scrap metal locally at the discounted price before they can export it. The transport cost is for the seller’s account. If there is no uptake, the seller may obtain an export permit from the International Trade Administration Commission of South Africa (Itac).
But because of the complexities of the PPS, Itac recommended a few years ago that it be replaced with an export duty of between 10% and 20%. However, the PPS was extended until July 31 2027. Now both the PPS and the export duties are imposed on scrap dealers.
Another factor is the large exposure of the government-owned IDC to mini-mills. Mackay estimates it at R14bn. By comparison, Amsa’s market cap is R1.43bn.
“We are giving cheap money to the mini-mills, but at the same time we want Amsa to thrive in this environment. You somehow think putting all this money into the market is not going to distort prices, but of course it does,” says Mackay.
Amsa announced in January that it will shut its long-steel production plants in Vereeniging and Newcastle. Government interventions in the scrap metal market and the flooding of cheap imported steel products may have been the final straw.
This is despite the introduction of provisional anti-dumping duties to the tune of 52% on imported structural steel from China and 9.12% from Thailand. The problem runs deeper than imports, says Mackay.
The easiest thing for the government to do is to get rid of export duties on scrap metal. “It serves no purpose at all, but it does cause harm,” says Mackay. It will not be enough for the government to do away with it, but it will make a difference,” he adds.
The preferred route would be to get rid of the PPS, but that would be a much harder sell. The government could, however, remove the more “noisome” aspects of the system, such as not forcing scrap metal dealers to pay for the transport of their product to the buyer.
In a Financial Times interview, Dani Rodrick, a member of President Cyril Ramaphosa’s economic advisory council and Ford Foundation professor of international political economy at the Harvard Kennedy School, offered a high-level view on what is needed for a successful industrial policy: “It requires a certain amount of government discipline. Not ‘discipline’ in the sense that the government must learn to pick winners. I don’t think any government can systematically pick winners. But neither can the private sector.”
Rodrick says it requires the discipline of monitoring, figuring out whether what you’re doing is working, and being able to move away from mistakes when things aren’t working. “Successful industrial policy is not about picking winners, it’s about letting the losers go. Some of the worst cases of industrial policy are when you keep putting good money after bad.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.