MITTAL vs the DOWNSTREAM: STEEL INDUSTRY WAR
29 AUGUST 2016
The downstream Steel Industry, under siege for decades, is facing its next huge crisis.
For many years, ArcelorMittal South Africa (AMSA), South Africa's dominant liquid steel producer, found the South African steel market to be a favourable playing field. For a long time they could keep their input costs low as a result of a preferential supply agreement for iron ore. However, whilst having this lucrative iron ore deal, AMSA charged the South African downstream industry similar prices to what they (AMSA) obtained on international markets. The downstream industry paid high prices for their steel, whilst AMSA made huge profits.
At the same time, according to Lionel October, Director General of Trade and Industry, AMSA "... took out all its money via management contracts, paid low dividends to shareholders, made absolutely no investment. It sweated its assets to the point where plants were collapsing."
These were extremely difficult years for the downstream Steel Industry. While the main steel role players made huge profits, they were able to buy 'labour peace' through high wage agreements, forcing those agreements upon the already embattled downstream industry through the mechanics provided for by an SMME hostile Labour Relations Act - resulting in the prescribed minimum wage in the Steel Industry being at least 35 percent higher than South Africa's second most expensive industry.
Then the world in which the Steel Industry functioned changed completely. The world economy went south and China became a major role player, also with regard to the supply of steel. All of a sudden the downstream steel industry found relief in more affordable Chinese steel. The downstream industry was no longer dependent on AMSA steel alone.
This turn of events however did not suit AMSA. When, according to their calculations, the importation of more affordable, good quality steel from China became a threat, they, instead of upgrading their outdated plants, convinced government to introduce a 10 percent tax (customs duty) on imports. When, in their view, this was not enough, they applied for further taxes to be levied on imports - this time safeguard duties of an additional 30 percent.
The 10 percent customs duty which was introduced last year already serves as a slow poison, killing the downstream industry. It prevents the downstream industry from being able to defend its market share against cheaper imports of finished products. It speaks for itself that if Chinese mills can export their coil cheaper than AMSA to South Africa, how can smaller, more vulnerable South African downstream manufacturers defend themselves against the importation of the Chinese finished products made from the same (cheaper) steel?
Any idea of protecting the downstream industry against finished imports is simply a non-starter. The whole idea is a smoke screen and the result of an attempt to justify the protection of AMSA. The downstream industry is simply too diverse to even attempt any 'protection' of this nature. It will also be administratively unachievable.
Once you embark on the path of protection, you will always discover unintended, unforeseen consequences. The protection of the one always eventually demands the protection of the other. It’s a never ending cycle. The answer lies in the lifting of all protection and the forging of a new, creative solution; it lies in the ability to adapt to a new reality. China is the new ‘steel reality’; protectionist measures are, at most, a temporary solution, delaying the inevitable.
If AMSA succeeds in convincing government [or the International Trade Administration Commission (ITAC) which is tasked to make a decision in this regard] to introduce the further safeguard duties which they have asked for, they (AMSA) will to a large extent succeed in using the downstream industry as a buffer to protect their old ineffective steel mills against good quality, more affordable Chinese steel. Since the downstream will not be able to import, there won't be any pressure on AMSA to upgrade their steel plants in order to become more effective.
In an article in the Sunday Times of 21 August 2016, an incident in 2013 highlights a glaring irony. When the price of iron ore fell dramatically in that year due to the global economic slowdown, AMSA threatened Kumba that it would import iron ore for less than their erstwhile cost-plus arrangement. Ironically, now that the downstream industry wants to import more affordable Chinese steel, AMSA calls on government to introduce measures that will make it impossible for the downstream industry to do so. When things went well for AMSA, they had no mercy for the downstream industry; now that things are difficult they call upon government to help them by denying the downstream industry access to more affordable steel.
It is argued by AMSA and government that South Africa needs a liquid steel producer. Contrary to that, the downstream industry sees a liquid steel producer as a very convenient, even important luxury, on condition that it justifies its existence through its value to the market, not to the detriment of the market. AMSA argues that in its absence, should it exit the market (if further protection is not granted), the downstream industry might one day be subjected to a dominant Chinese market. What AMSA is doing is to transform a potential danger into an immediate danger. What a dominant China could one day potentially do to the downstream industry, AMSA will be doing immediately, should they get what they ask for.
There is a deep sense of concern in the Steel Industry that the decision to be made by ITAC on the issue of further protection for AMSA - in the form of safeguard duties - will not be objective. The Department of Trade and Industry has made up their minds - according to them South Africa has to have a primary steel industry and, also according to them, current protectionist tariffs are low by international standards. Has the decision in favour of further protection, sacrificing the downstream industry, already been made?
In a very recent article, reported in Sunday Times Business on 21 August 2016, one of ITAC's five commissioners wrote that a lower primary steel price does not automatically benefit downstream players. The question is: is he subtly preparing the downstream for the direction ITAC intends to take? In the meantime we want to point out to this ITAC commissioner that post war Germany and Japan, as well as modern day China, Vietnam and India, prove that he is simply wrong. We challenge him to name a single developing nation where higher steel prices assisted a downstream industry, in any way, to industrialise a country or to create jobs. Just give us one example.
Government, without the input from the ITAC Pricing Committee, which they have appointed for this purpose, has agreed on pricing principles to 'ensure that domestic prices do not increase on an import parity basis when the international steel price increases in the future.' According to Mr Rob Davies, Minister of Trade and Industry, the pricing principles will be determined by the weighted average of countries South Africa competes with, but it will exclude China and Russia. This pricing formula is, however, flawed from the outset. How can you even contemplate leaving China, the world's most dominant steel player, out of the equation? To government, with respect, and to AMSA, we, the downstream industry say: this arrangement does not suit us and it is not in South Africa's interest. As a member of the ITAC Pricing Committee, I do not support this pricing formula.
The mood in the Steel Industry is perhaps best described by the remark made by the MD of a major role-player in the Steel Industry during a recent AMSA information session. After a briefing session by the new AMSA CEO in which he attempted to explain the importance and virtues of AMSA, this MD responded with the following statement: "Stop patronising us. You are not doing it for us; you are doing it for yourself."
The future of the Steel Industry hangs in the balance. Will the downstream industry be sacrificed to rescue one dominant role player, whose motives are all but trusted by the downstream industry? Who will even dare to make such a decision? Is the gravity of this matter not of such a magnitude that it needs to be debated by Parliament and the decision then taken by Cabinet? There is just so much at stake. The wrong decision, taken in haste or within the context of political pressure, will have devastating consequences and there will be, for as long as AMSA enjoys the protection it now asks for, no peace between them and their customers.
This opinion piece is by Gerhard Papenfus, Chief Executive of The National Employers' Association of South Africa (NEASA).
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Annika van Heerden