The steel producer says there is adequate supply of scrap metal to meet demand and an export tax is unnecessary and would be harmful.
In a National Treasury report it is noted that export taxes on scrap metals are used in a few countries, and especially amongst a few of the large BRICS countries. According to the most recent update in the OECD’s inventory of export restrictions on industrial raw materials, 32 countries have applied some form of export restriction on scrap metal (15 out of these countries make use of an export tax on scrap metal). In terms of ferrous scrap, 14 countries impose an export tax which is as high as 40%. For example China charges (40%), Russia (12.5%) and India (15%), whilst some countries impose an absolute tax per ton.
In view of the above and notices that ITAC exercise its powers under the International Trade Administration Act, 2002 to regulate the exportation of scrap metal that dates back to May 2013, there has been ongoing debate on what measures should be taken on the export of scrap metal. Before the meeting of the Standing Committee on Finance (National Assembly) on the 7th October 2020 public comments were invited on the draft taxation laws amendment bill 2020 (draft TLAB) on the proposed introduction of export taxes on scrap metals. Various comments that were submitted have emerged and can be found on the Internet – the addresses are in the story: Scrap metal exports: Price Preference System vs export duty tax.
Colin Hautz, the Chief Marketing Officer of ArcelorMittal South Africa (AMSA), submitted a fairly lengthy comment (https://www.mra.co.za/proposed-introduction-of-export-taxes-on-scrap-metals-061020/) to the Standing Committee on Finance (National Assembly) on the draft taxation laws amendment bill 2020 (draft TLAB): Proposed introduction of export taxes on scrap metals (ferrous), outlining AMSA’s position, which mainly concerns ferrous scrap.
In his comment Hautz says: “ArcelorMittal South Africa (“ArcelorMittal”) is fully committed to and supportive of government’s intentions to stimulate growth, employment and development across the ferrous scrap and steel value chains in South Africa. As this is of national importance, the viability of the ferrous scrap and steel sectors should be maintained, by providing a framework that enables private sector participants to maximise their potential. However, ArcelorMittal believes that government interventions and policy considerations in these sectors need to be carefully evaluated, given the significant impact which such policies could have in times to come.”
“ArcelorMittal disagrees in principle with, and does not support, the proposal of an export tax on ferrous scrap metal (“Proposed Tax”) as proposed in the TLAB. In summary ArcelorMittal is of the view that the Proposed Tax should not be introduced for the following reasons:
• There is more than adequate supply available to meet local demand and such a tax would only dampen domestic prices, the benefits of which will not flow to the broader economy in general but rather accrue to the direct users of the resource, the electric steel makers.
• A decrease in the local scrap price would dampen the incentive for collection and this would negatively impact the informal sector in particular.
• The Proposed Tax would therefore not be beneficial to the downstream scrap suppliers who should be the beneficiaries of such intervention.
• Even though ArcelorMittal would enjoy some benefit directly from lower scrap prices, it will have a disproportionate effect on steel producers using iron ore (like ArcelorMittal) and we believe that the longer-term impact on the steel industry would be negative.
• Our concern is that the export tax will have adverse long-term effects and is ultimately prejudicial to economic growth, and ArcelorMittal firmly believes that its implementation will do significant harm to the manufacturing sector in South Africa, as explained in the four topical areas highlighted below.
• Domestic availability of scrap metal: There is no shortage of scrap.”
“There is not a lack of quality scrap metal in South Africa. With industrial-scale steel production since 1934 South Africa has accumulated a scrap pool that can be reasonably estimated at circa. 140 million tons. This scrap pool is increasing at a nett rate of roughly 2 million tons per year: Additions of ca. 4.5 million tons of steel (domestic and imports) and subtractions of ca. 2.5 million tons for steel-making and exports.”
“South Africa has some of the lowest scrap prices in the world, on average 75 to 80 US dollars per ton below the South East Asian scrap price. That there are complaints of a lack of scrap in the country is an indication that the scrap prices are too low to motivate scrap merchants to collect and sort enough scrap. If at present levels, pricing is insufficient to incentivise scrap collection then the answer cannot be an export tax which will only reduce domestic scrap prices further and thereby dis-incentivise collection even more.”
“It should also be noted that 2018 was a profitable year for the steel industry globally with significant spread between long products prices and the scrap price. As such the reported difficulties of electric steelmakers in South Africa to be profitable during this period seems more likely to be linked to the structural overcapacity of steel-making in the country rather than to the price paid for scrap.”
“As a final point on scrap availability, the highest quality scrap comes from the manufacturing sector. The off-cuts remaining at the end of the manufacturing process. This scrap is the highest quality because it is coming from fresh steel and is promptly recycled. The volume of prompt scrap available therefore depends on the level of activity in the manufacturing sector. To have more prompt scrap South Africa needs more manufacturing activity and to generate this, given that neither the economy nor demand are growing, requires government to protect downstream industries proactively from imports of finished goods.”
Support to small business/informal sector
“The informal scrap collection sector who are the main source of “brown” scrap will be paid less for the material they bring to the scrap merchants, resulting in a reduction of what is already a small take-home income. Also, with lower realised prices and lower volumes being processed, the scale and efficiency of scrap collection will be lost, so this part of the economy will shrink.”
Output and pricing
“The Proposed Tax will be equivalent to a significant and disproportionate direct subsidy to electric steelmakers having a distortive effect on the market. While it is clear that electric steel mills will benefit from lower scrap pricing, given that there is a structural over-capacity of steel-making in the country, South Africa will suffer disproportionately.”
“The subsidy by way of an export tax (proposed as R1 000/t) given to the mini-mills may allow increased production in the near term, but the longer term more serious implication will be the reduction of collection of scrap and a distortive effect in the market which may result in the further closure of plants due to the impact of what could be seen as a government subsidy. For example, South Africa could lose the capacity to beneficiate up to three million tons of iron ore.”
“South Africa could lose the ability to make high-end, high-quality steels which can only be made directly from iron ore. These steels are crucial inputs to the automotive sector (e.g. springs, hubs, forgings), the mining sector (e.g. high strength rock-bolts) and to high added-value exports. Without domestic production, companies dependent on these products will be forced to down-size or close.”
“Wire producers who depend on wire-rod from ArcelorMittal will be forced to either reduce significantly or close their businesses.”
“As a result of the distortive effect of the Proposed Tax as explained above, it is also likely that it could affect investment decisions regarding upstream iron-ore based production and lead to job losses. With regards to the level of the Proposed Tax, it has also been stated that the Proposed Tax is intended as a replacement of the Preferential Pricing System (PPS). However, at R1 000/t it would have a significantly larger impact than the PPS ever had (R45/t).”
“On an annual basis, the average gap between domestic scrap prices and export prices has ranged between +R200/t and -R200/t. Prior to PPS, the average monthly domestic scrap price was 84R/t more expensive than the export price. Under PPS, the average monthly domestic scrap price was 39R/t more expensive than the export price. So, the nett effect of the PPS can be estimated as a 45R/t impact on the domestic scrap price.”
“Also, stating that the R1 000/t duty is based on an ad valorem rate of 20% would imply an expectation that scrap prices would be R5 000/t, which is a level not seen since prior to 2012. Our experience is that the present domestic pricing is significantly below this amount (by more than 30%).”
“Consequently, in the event that our main recommendation, to not introduce the tax, is not acceptable, then at least the imposition of the export tax should be based on realistic calculations as explained above. This would indicate a maximum value of R50/t. At a level of R1 000/t, as proposed currently, the export tax is excessive.”
“For the above reasons, we respectfully submit that the Proposed Tax would be a significant mistake which would cause irreparable harm to the South African manufacturing sector.”
“None of the above takes away the fact that the steel sector is in significant difficulties, due to structural over-capacity. As explained previously, the Proposed Tax will provide a disproportionate direct subsidy to electric steelmakers, to the detriment of the integrated steelmaking route based on iron ore, and thereby have a distortive effect on the steel market. If such a subsidy on the raw-materials of electric steelmakers is implemented, similar support (i.e. an export tax) should be provided to the raw materials flow for the integrated steel route, namely on iron ore and coking coal.”
“Our understanding is that such reasoning (i.e. support via an export tax) is being contemplated for application to ferrochrome ore exports, and thus would be consistent with a broader ore beneficiation policy.”
The full letter is posted at: https://www.mra.co.za/wp-content/uploads/2020/10/Proposed-Introduction-of-Export-Taxes-on-Scrap-Metals-061020.pdf and the Metal Recycler’s Association of South Africa (“MRA”)
Scaw Metals’ CEO and a Director of the Barnes Group Doron Barnes comments
Meanwhile Scaw Metals’ CEO and a Director of the Barnes Group Doron Barnes told MPs that the proposed export tax of R1 000/t of scrap ferrous metals proposed by Treasury was needed if the steel industry was to survive.
In contradiction to Hautz’s comment in Business Day: “That there are complaints of a lack of scrap in the country is an indication that the scrap prices are too low to motivate scrap merchants to collect and sort enough scrap. If at present levels, pricing is insufficient to incentivise scrap collection then the answer cannot be an export tax which will only reduce domestic scrap prices further and thereby disincentivise collection even more.” Barnes, who is also chair of the Electric Steelmakers Association, said an export tax on ferrous metal scrap would be a decisive measure to limit exports, and would provide the domestic steel industry with a much-needed competitive advantage in the context of electricity constraints, high input costs and reduced demand.
He said an export tax would foster competition in the steel market and increase investment in the upstream sector.