Are South African industrial trade policies being done by stealth? Why are they happening behind closed doors?

Just like the steel and chrome ore industries, the South African government has implemented a 15% duty without consultation on aluminium sheet products – gazetted on 31st December 2020.

Protecting your own turf and moving away from free trade, especially China, is a global trend but not necessarily the correct one.

On 31 December 2020, the South African Revenue Service (SARS) issued Notice R.1428 increasing the import duties on aluminium plates, sheets, strips and aluminium foil from duty-free to 15%. The affected products are classified under the tariff subheadings 7606 and 7607.

The import tariff applies to all countries except for the ones belonging to the Southern African Development Community (SADC), EU and EFTA.

Well-known editor-at-large and columnist Peter Bruce asked international metals trader and Hulamin shareholder Volke Shütter why would trade and industry minister Ebrahim Patel slip through a huge 15% import duty on aluminium sheet products in the very last government gazette of 2020? Is it because the state is the biggest shareholder in Hulamin, our only producer of aluminium sheet products and can’t compete? Why is industrial policy happening behind closed doors? It seems inevitable that if you take price pressure off local producers by protecting them from imports, then prices in South Africa will inevitably rise.

The global aluminium industry has grown substantially in the past few decades, driven through increased demand from a growing, industrialised population. In particular this is due to increased demand from the automotive industry for automotive body sheets and components, as well as for beverage cans and for windows, doors and cladding in the construction industry.

Last year in June aluminium group Hulamin reported that it had written down its businesses by R1.3 billion as it battled an operating environment characterised by increasing protectionist trade measures in the US and a deteriorating South African economy. The writedowns are about three times the group’s R393 million market capitalisation.

Group sales volumes decreased by 11% to 219 000 tons in its year to end December 2019, with 2019 characterised by a weakening Chinese economy, and pressure on aluminium prices.

The group’s loss widened to R1.2 billion, from R773 million previously, and Hulamin has opted not to pay a final dividend, having distributed about R58 million in final dividends to shareholders in the prior year.

In the podcast ( Shütter said this latest duty was flaunting WTO rules and is the third one in the last 10 years. There was a 15% duty put on extruded products three years ago.

“But what can you expect when the biggest shareholder in Hulamin is the government. Through the IDC the government has a 30% stake. There should be a complete change of management at Hulamin who have been allowed to bumble around for far too many years now and this is why Hulamin is making these losses.”

“Another factor is that Hulamin is trying to be a jack-of-all trades instead of specialising. When the company started in 1985 it was viable and necessary to produce as many different products because they had a captive audience.”

“It is not sustainable and the product range should be cut and concentrate on those that are profitable. The can industry for example is one that South Africa is recognised for and there is a growing demand for lightweight aluminium cans in the beverage industries.”

“Keeping feedstock local and better use of scrap is another incentive. Five years ago Hulamin invested in a scrap converting machine, which is still not working properly and management continues to throw cash at it. They won’t admit that they are wrong in their decisions.”

Shift in government economic policy – very little discussion
“There is definitely a shift in government economic policy with very little discussion taking place with industry. Look at what is happening in the steel industry. There is a proposed tax on scrap metal and duties have been imposed to protect ArcelorMittal even though they have reduced stock levels and production. Blast furnaces have been turned off and the downstream industries are suffering.”

“In the case of aluminium you can buy South African aluminium, produced by Hulamin, in Europe cheaper than you can buy it locally. There are many cases where this South African aluminium is imported back into South Africa at a cheaper price than can be purchased locally. How is this allowed to happen? We are not sure if dumping is taking place but the Hulamin website says that the company is 60% export orientated. It is no wonder they are making losses if this is happening.”

“This practice can only affect the downstream industries where 1 000s of people are employed. In Pietermaritzburg there are 1 700 people employed. Why would you protect this small amount as compared to the 1 000s downstream?”

“Government should be encouraging growth in local capacity and usage rather than protecting prices. Blocking policies and duty borders are not the answer. You must have an open policy and not one of protecting your turf, which seems to be a worldwide trend.”

“Technically Hulamin is a sound plant but it needs continuous investment. Look at China – they have invested in the latest equipment and as a result they are very competitive.”

“South Africa’s plant can manufacture 250 000 tons of material in a year but when you can compare it to two million tons for a new plant in Asia, then you have to be on top of your game.”

“Hulamin’s share price in 2008 was R150. The share price is now round about R2. I was lucky I purchased shares when they were rock bottom – R1 a share.”

“The company has potential but all the above-mentioned need to happen. Do not seek protectionist pricing, change management, protect the cash-flow, concentrate on only producing the profitable products, look after the downstream industry and invest in the plant and processes.”

From duty free to 15% ad-valorem
ITAC increased the general rate of Customs duty on aluminium plates, sheets, strips and foil classifiable under tariff headings 76.06 and 76.07 on Thursday, 31 December 2020.
On 31 December 2020 SARS implemented a significant increase in the general rate of Customs duty on aluminium plates, sheets, strips and foils. The general rate of duty on all product categories covered under tariff headings 76.06 and 76.07 increased from duty free to 15% ad-valorem. This is the outcome of a tariff investigation initiated by ITAC on 29 March 2019 in response to an application brought by Hulamin.

Whilst the ITAC Commission meeting at which the matter was decided already took place on 12 November 2019, it took more than a year from the date of the Commission meeting for the tariff increase to be announced. This is unusual as tariff amendments are typically implemented within 6 to 8 weeks from the date of the Commission meeting in which the Commission decide the matter and forward their recommendation to the Minister of Trade, Industry and Competition. It is not clear where the delay occurred. Was it with ITAC, the DTIC, the Department of Finance or with SARS?

The delayed announcement came as a shock to manufacturers and fabricators in the downstream aluminium value chain as such a high level of duty, applied this high up in the value chain, usually spells disaster for the downstream manufacturing sector which depends on competitively priced raw material in order to compete against low priced imports of finished products. The level of business failures and disinvestment in the downstream steel sector, following the significant tariff increases on steel, coupled with safeguard duties on hot rolled steel, is a stark reminder of this.