South Africa’s leading steel producer, ArcelorMittal South Africa (AMSA), has made a strong case for increasing tariffs for an industry that is somewhat unique among its global peers in not enjoying import protection. Its argument, articulated forcefully by CEO Paul O’Flaherty, is that there is a glut of steel globally, which is depressing prices to multiyear lows and raising imports. In addition, AMSA believes the oversupply situation and depressed prices will linger for up to five years.
While there are 60-odd steel-producing countries, the JSE-listed company fingers China for much of the blame. It asserts that the giant Asian economy – which producers about half of the 1.6-billion tons of steel made globally – is “subsidising” its producers, which are, in turn, flooding the world market with cheap exports that are priced below South Africa’s cost of production. The subsidies, AMSA claims, take the form of preferential loans and/or direct credit form State, commercial and policy banks, equity infusions, the provision of power and water at below cost, export-credit reimbursements, land-use tax refunds and direct cash grants.
Chinese imports into the relatively small South African market, which is unlikely to breach the five-million-ton mark in 2015, have risen, with about 30% of all steel consumption supplied from abroad during the first half of 2015 attributed to Chinese imports.
Prices have fallen in tandem, which O’Flaherty acknowledges has benefited some steel consumers. However, he argues that the benefits will be short-lived. “If you think that Chinese imports of steel are a good thing and you think that we don’t need a primary-steel industry, it won’t stop there . . . and there will be imports of subsidised steel products at low prices right down the value chain.” Protection for primary steel, AMSA claims, will ultimately also help South Africa’s top five steel consuming industries of building and construction, structural steel, cables and wire products, automotive and mining, which collectively contribute 15%, or R600-billion, to gross domestic product and employ eight-million people directly.
However, for government, the decision to protect the industry will not be an automatic one. It remains bitterly aggrieved by the fact that AMSA never honoured a 2001 promise to deliver ‘developmental prices’ in return for a deal that salvaged the company and guaranteed it access to cost-plus iron-ore – ironically, this cost-plus arrangement is currently said to be a drag on the group, which claims to be paying up to 60% above export parity pricing levels.
In a response to a question as to why government should trust AMSA this time round, O’Flaherty had the following to say:
“Why is it different? [Firstly], we are talking about a pricing model that is completely different to the pricing model we have had before. Why is it different? It’s because we acknowledge our failings on broad- based black economic empowerment and we are doing something about it.
“It’s different because we are planning to invest R4.5-billion in specific products. So I think the company has changed . . . we understand what’s required. It is about a trust relationship, but it’s also not a one-sided ‘we want tariffs’. We are offering a pricing model that potentially caps future profits, which is unheard of in the steel industry, quite frankly.”