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The woes of the steel industry continue

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The woes of the steel industry continue

Willemien Viljoen, tralac Researcher, comments on the growing protectionism in the South African steel industry

The South African steel industry has increasingly been facing difficulties due to rising costs, competitive imports and allegations of uncompetitive practices. This has seen the closure of some steel mills and job losses over the last year. As a result, there has been numerous applications by the primary steel producer in South Africa to protect the domestic industry from rising imports. Thus far the steel industry has been successful with five applications to increase the import duty on various steel products, while two safeguard measure applications are still pending; the latest of which was notified to the World Trade Organization at the end of July 2016.

The majority of the steel products which have been affected by these tariff measures and which have been included in the safeguard applications fall under Chapter 72 of the Harmonised System (HS) codes; base metals and articles of base metals. The main products in this chapter which have seen an increase in tariffs include products of iron or non-alloy steel in various forms (semi-finished; flat-rolled; bars and rods; angles, shapes and sections), but thus far excludes stainless steel product imports. Of the 170 tariff lines at the HS6 level in Chapter 72 40 percent (68 tariff lines) of the tariff lines have seen an increase in the general rate of duty from duty free to the WTO bound rate of 10 percent. The tariff increases have mainly been for products which falls within HS7206 to 7215. Of the 66 tariff lines in the range only 26 percent now remain free of duty. However, this is only the general rate of duty (MFN applied rate) and these products can still be imported from the rest of SACU and SADC, the EU and the EFTA states free of duty due to preferential tariffs in place. Seeing that South Africa is a member of SACU, a customs union, it is not just the South African import tariff which have increased, but the Common External Tariff which also affects steel imports into Namibia, Botswana, Lesotho and Swaziland (BLNS).

The tariff increases have mainly been in a response to increasing steel imports from China. The trade data shows that SACU imported steel products in Chapter 72 to the value of US$ 1.27 billion in 2015 of which South Africa imported 85 percent, Namibia 8 percent, Botswana 4 percent, Swaziland 2 percent and Lesotho 1 percent. South Africa mainly imports steel products from China (40%), Germany (7%), Japan (5%) and Sweden (5%). Namibia mainly imports steel products from South Africa (76%), China, (17%) and Sweden (3%). Botswana, Lesotho and Swaziland mainly import steel products from South Africa; 95%, 99% and 92% respectively. Year-on-year growth rates show China’s imports into the SACU region has increased by 18 percent between 2011 and the end of 2015. In terms of the 68 tariff lines which have faced tariff increases, South Africa mainly imports these products from China (56%); while South Africa is the main exporter of these products to the BLNS countries (95%, 99%, 82% and 92%).

There is also an overlap between the products on which tariffs have been increased and the ones forming part of the safeguard investigations. The first safeguard investigation was initiated in March of this year and the final determination is expected in October. The second was notified at the end of July. Both these applications were lodged by the South African Iron and Steel Institute (SAISI) on behalf of the SACU industry. These investigations cover a total of 27 tariff lines in Chapter 72 at the HS6 level and the period under investigation is January 2012 to December 2014 and December 2015, respectively. Based on the preliminary determination the International Trade Administration Commission (ITAC) made regarding the investigation launched in March, it is expected that ITAC will grant further relief for the SACU steel industry once the final determination is announced in October.

In both the tariff increase and safeguard applications a very bleak picture of the domestic steel industry is painted: an increase in global steel production capacity which has led to global oversupply and depressed global steel prices; deterioration in the financial situation of SACU steelmakers which have seen the closure of steel mills in South Africa and job losses; a decrease in the market share of local steel producers and capacity utilization and escalating costs. This bleak picture has been very successful thus far to ensure the protection of the primary steel producer in South Africa and SACU even amid opposing views that their demise is not totally to blame on imports and the global steel situation due to outdated production facilities and technology, the inability of domestic producers to meet demand due to limited product ranges necessitating imports, the poor quality of locally made products and uncompetitive practices which has seen the primary steel producer in South Africa brought before the Competition Commission. There is also worry about the effect the tariff increases (and further duty increases if safeguards are applied) will have on downstream industries, not just in South Africa but especially the effect on industries in the BLNS countries. However, in all the tariff investigations the concerns regarding mill closures and job losses have triumphed over concerns regarding the rising costs and uncompetitiveness of downstream industries due to increasing tariffs.

But it seems that these concerns have not completely fallen on deaf ears: in each case of tariff increases, conditions were attached to the tariff increase. These vary from the review of the duty structure three years after implementation to required additional investment in new plants, machinery and technology; the commitment not to further close any operations and the establishment of a Steel Pricing Committee to monitor the impact of the tariff changes. At the end of June 2016 the Economic Development Minister announced the members of the Steel Pricing Committee. However, this announcement has been scrutinized for the fact that the Department of Trade and Industry is not represented in the Committee. This has raised questions about the effectiveness and the purpose of the Committee seeing that the Committee falls under the purview of ITAC (which falls under the Department of Economic Development) while the regulation of the South African steel industry falls within the ambit of the Department of Trade and Industry.

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Sources:

SARS (www.sars.gov.za);

ITAC (www.itac.gov.za);

TradeMap (www.trademap.org)

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