No safeguarding conspiracy between government and ArcelorMittal

23 Aug 2017

Business Day, 23 August 2017
By Rob Davies

Gerhard Papenfus — CEO of the National Employers’ Association of SA (Neasa) — really needs to be called out on his piece, ArcelorMittal has benefit of safeguards despite making inferior steel at times (BD Live, August 15 2017).

His basic argument is pretty simple: the Department of Trade and Industry is mollycoddling a monopolistic steel producer (ArcelorMittal SA) at the expense of downstream steel fabricators. This is a potentially arguable point. But the aggression with which he attacks the department ends up doing no service to his cause.

Papenfus positions himself as the tribune of the downstream industry. "Safeguard duties would result in the immediate downsizing of downstream businesses and consequently retrenchments, resulting in many more job losses than would have been the case if Arcelor, in the absence of safeguards, were to close a part of its operations."

This is not our reading of the situation; nor have we heard this projection articulated in our direct interactions with the downstream industry. Indeed, we have developed strong relationships and have agreed on real, forward-looking remedies to help it remain sustainable in these tough times for the steel industry.
You wouldn’t have guessed this from Papenfus’s piece, which is very short on detail about a complex and protracted process of negotiation that has been going on for the past year and more; mainly, it seems, because he has a wider purpose in mind. The issue of steel production and use gives him the pretext he wants for an attack on the government as a whole.

"The problem lies in the fact that business, especially big business, believes that it has to be polite when dealing with the government. There is just not sufficient push-back. Perhaps big business still benefits too much from its cosy financial relationship with the government, not realising that poor government decisions and policies will one day lead to these benefits disappearing; not realising that ‘dissent is the highest form of patriotism’."

And then, the clincher: "The government can do as its pleases — at least this is what it believes — especially since the consequences of ill-advised decisions take a long time to materialise. When the adverse effects of these decisions come to light, the government will apportion blame somewhere else."

Ok, clear enough: there’s a political-ideological programme here, with Papenfus presenting himself not merely as the tribune of the downstream steel-user but, more grandly, as the democratic champion of business-at-large against overweening, unaccountable government decision-making.

As it happens, however, the facts of the steel case tell a very different story.

Like many other countries in the world, the South African government has been forced to intervene to save the steel industry from the threat of closure and loss of capacity. Was this just dumb? Or some form of illicit collusion?

Let’s address the basics: steel is fundamental to manufacturing. Global consumption by volume and value exceeds all other metals. If a product is not made of steel, chances are that it will be manufactured from a machine or tool made of steel. In SA, 190,000 people are employed in the direct iron-ore, steel-making and fabrication industries.

Top steel-consuming industries (automotive, construction and mining) contribute about R600bn to SA’s GDP and employ about 8-million people (directly and indirectly). Many countries around the world are grappling with the steel crisis, characterised by structural problems, massive excess capacity and dumping, exacerbated by weak economic recovery and depressed market demand.

The crucial issue here is that the loss of SA’s primary steel-production capacity (meaning that we would become nothing more than an exporter of iron ore and an importer of steel) will leave us at the mercy of the global steel market in the long run — and will preclude us from using our comparative mineral resource endowment advantage to any good effect. In general, there is a positive correlation between GDP and steel intensity for developing countries. And we must use it.

If we don’t, what will follow? Many small-and medium-sized enterprises (SME) that rely on Arcelor supply — and simply do not have the capacity to import steel — will go under. (It should be noted, too, that our ports themselves don’t have the capacity to import all the steel needed for the downstream industries). So who, in reality, is defending the downstream sector?

The Departments of Trade and Industry and Economic Development (as the two lead government departments) have responded to the crisis with a set of carefully calibrated measures to save the overall industry — both upstream and downstream — from the threat of wholesale closure and loss of capacity.

Over the recent period, the following negotiated measures have been developed and are being implemented by government and stakeholders:

• An increase in the general rate of customs duty on primary steel products to 10% and safeguard measures for a period of three years on hot-rolled coil and plate products.

• Downstream support measures, including tariff increases on a range of downstream products and the deployment of rebates.

• Agreement on a set of principles for flat steel pricing in SA that is set appropriately to ensure steel-dependent industries are competitive — while at the same time ensuring the upstream steel mills remain sustainable.

• Local procurement by government: that is, the undeeming of primary steel in designated products (requiring the use of locally manufactured primary steel); and the designation of downstream steel-intensive construction products and components.

• Settlement of the Competition Commission issues with Arcelor.

• Investment support through 12I tax incentives.

• Incubation support for SME development.

• Establishment of a R1.5bn steel development fund to support key downstream steel sectors/sub-sectors.

Perhaps, in this context, Papenfus could tell us why the government’s "consultation with the downstream industry was a farce, and was simply done to pay lip service to the process and not to influence the outcome in any way".

The reciprocal conditions attached to the above policy support measures include commitments by Arcelor to invest R4.6bn over five years; implement a competitive pricing policy; retain jobs; and increase industrial output.

Compliance is independently monitored and evaluated by the International Trade and Administration Commission (Itac) steel committee — consisting of Itac commissioners, representatives of the downstream and upstream steel industry and invited government officials.

We do, of course, agree with Papenfus that the manufacturing industry needs competitive prices. We have been monitoring global steel prices for more than a decade and have developed a basket pricing methodology based on domestic prices in comparable competitor countries. Arcelor’s flat steel prices are monitored against this basket on a monthly basis — providing a transparent, quantitative method to ensure we have competitive local prices and that the duties and safeguards will not be added to the price.

The flat steel pricing principles agreement with Arcelor — together with the pricing remedy in the Competition Commission settlement — is an important achievement in the battle against excessive flat steel pricing in the domestic market; and it reflects government’s commitment to protect downstream consumers of key industrial inputs.

We are not alone in thinking so. At the last meetings of the Group of 20 and Organisation for Economic Co-operation and Development (OECD) steel committees held in March 2017, the trade union advisory committee to the OECD highlighted that the approach SA has adopted in response to the crisis has been exemplary.

Arcelor acknowledges supply issues and government is engaging with the industry on a case-by-case basis to address them. Moreover, while the feedback from customer surveys over the past five years (compiled in a recent report on the "health of the downstream steel industry") identifies on-time delivery and lead times as challenges, it also recognises that we have local products of favourable quality compared to those of our main competitors.

The local steel construction industry has significant capabilities, skills and capacity to supply the state infrastructure programme, mining, oil and gas sectors. Mining has been an important part of the South African economy for many years and South Africans have developed considerable skills in the design and construction of mining-related structures.

The downstream, labour-intensive sectors of our economy remain a clear and pressing priority, with measures to support these industries being fast-tracked through the collaborative efforts of government departments and institutions including Itac, the South African Revenue Service and the Independent Development Corporation. The use of tariff barriers and localisation to stimulate demand enables domestic production to reach higher capacity, bringing down local production costs and improving competitiveness.

The key focus must therefore continue to be on upgrading, innovation and higher value-added steel products for export into the regional construction and mining sector so as to move towards a more sustainable path in the current situation of global excess capacity. A competitive steel industry that can support investment and increased jobs remains a major priority for government.

We are serious about this, and throwaway censure, with cheap allegations of a back-door conspiracy, are less than helpful.

• Davies is Trade and Industry Minister