Scrap metal exports: Price Preference System vs export duty tax

The intentions and rationale behind the proposed introduction of an export tax on scrap metal may be contradictory to the greater wellbeing of the scrap metal sector say some.

Much debate is taking place at the moment on the subject of scrap metal exports. The requirement of local foundries and mini mills must be balanced with opportunities for scrap merchants to export some levels of scrap. On 3 July 2020 the Minister of Trade, Industry and Competition issued a Trade Policy Directive to ITAC to investigate the PPS, during this time the administration of the PPS and the export of scrap metal was suspended, subject to exceptions, to address some of the immediate challenges relating to access to scrap due to the effects of COVID-19.

The temporary suspension ended on 2 October 2020 after measures were put in place to deal with loopholes in the PPS system in order to once again make scrap available in the domestic market. The introduction of an export tax is proposed as a sustainable policy measure to mitigate the weaknesses and loopholes inherent in the PPS. Government has also established an inter-governmental working group to increase efforts to combat illicit trade of scrap metal with the help of the South African Revenue Service (SARS). An outright ban of the exportation of scrap metals will also be inconsistent with South Africa’s obligations under the WTO agreement.

Some key issues on the introduction of export duty on scrap metals:

1) The introduction of scrap metal export duty affects section 48 and schedule 1 and 5 of the Customs and Excise Act of 1964. It is important to provide to the introduction of the export duty on scrap metals. In 2013, a Trade Policy Directive for the for the International Trade Administration Commission of South Africa (ITAC) to regulate the exportation of scrap metal through the introduction of the Price Preference System (PPS) was issued by the then Minister of Economic Development. The objective was to improve the availability of better-quality scrap metal at affordable prices for foundries and mills in the domestic market. This was going to assist these foundries and mills in becoming more cost competitive as against imports, enhancing investment, jobs and industrialisation.

2) National Treasury explained to the Committee that the PPS seems not to have provided sufficient support for the sector to flourish and compete with global counterparts, many of which benefit from an export tax on scrap and lower domestic prices for scrap. ITAC conducted an investigation and based on its findings, recommended that the current PPS be replaced with export duties since it has not effectively provided support to the foundries and mills with availability of affordable, quality scrap. An export tax is considered to be superior to the PPS in terms of its easy administration and is believed to be more effective in reducing the domestic price as it will have the effect of reducing the export price achieved by local scrap dealers.

3) Based on this background, the TLAB proposes that changes be made in the Customs and Excise Act and its schedules to insert provisions for the introduction of export duties on scrap metals.

4) During the hearings there was support for the introduction of this tax. Some stakeholders were even of the view that the export metals be banned completely. Some stakeholders expressed a view that the PPS had so far been ineffective in achieving its objectives. A view was expressed that the introduction of this tax will assist local manufacturers to supply material locally and this will stimulate and grow the economy. It will also make manufacturers more competitive in the export market. National Treasury also noted in this regard that scrap metal is a key input for downstream manufacturing and supports local beneficiation. National Treasury stated that the PPS has been circumvented in the past leading to illegal and excessive exports of scrap, resulting in a shortage of affordable scrap for local consumers. The National Treasury however cautioned that there remain some risks in the introduction of the export duty. Among these are that as South Africa is a signatory to many trade agreements which limit the use of export taxes, there was a real threat of retaliation from those who are not part of the relevant trade agreement.

5) While the Committee supports the introduction of this export duty, the Committee believes that its introduction should be done carefully and in a balanced manner in order to ensure that it achieves its intended objective. The Committee believes that a cost-benefit analysis should be conducted by National Treasury soon in order to ensure that the introduction of this tax has wider benefits for the broader economy than the costs. For those who advocated a total ban, the Committee believes that this will not be prudent at this stage as that may have some unintended consequences of severing ties with the global market for scrap metals, among others.

6) The Committee notes the opposition from some stakeholders to the introduction of this export duty. It also notes the responses of the National Treasury in response to this opposition. The Committee believe that scrap metal is a critical input to manufacturing and therefore to South Africa’s industrialisation with linkages to infrastructure, construction, mining and a range of other manufacturing industries. The National Treasury states that the three largest consumers of metal products in the country are the construction, mining and transport manufacturing industries which together contribute about R750 billion or 15% of the country’s GDP and employ more than 2 million people. The Committee therefore supports measures to ensure that local industries access scrap metal in an affordable manner as this will add value to the economy, especially as the government economic reconstruction and recovery plan focuses on industrialisation and localisation.

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