Steel gets a China shield
Beleaguered steel industry wants more than the modest tariffs being raised, but the state must find a delicate balance to protect SA’s manufacturing sector
The first, relatively modest, tariff shield is going up to protect South Africa’s beleaguered steel industry. At the same time, the mining industry, government and unions will tomorrow announce their set of “job-saving measures” after horse trading around a draft plan dragged on throughout this week. The release of a shock negative economic growth figure for the second quarter this week matched the overall tone set by the brief and mysterious collapse in the rand’s value against the dollar on Monday to a record low of R14.
The GDP number, a contraction of 1.3%, itself mostly reflects the damage done by a handful of major sectors.
Most of the GDP drop reflects the drop in manufacturing output, which in turn reflects a sharp drop in oil refining and the ongoing crisis in the steel industry.
South Africa’s oil refineries make up almost a quarter of the manufacturing sector, while iron and steel make up another fifth.
Technically, a recession occurs as soon as there are two successive quarters with a negative change in GDP.
The seemingly structural nature of some of the main drivers in the drop makes it very possible a recession will happen.
Steel, in particular, is on a long-term downward trend, with a recent surge in import competition leading to a slew of downsizing announcements – with thousands of jobs on the line at ArcelorMittal SA (Amsa), Evraz Highveld Steel and Vanadium, as well as Scaw.
Mines are also dragging down the GDP figure, contributing 0.5% of the 1.3% drop.
That was almost entirely due to iron ore production falling 13.4% in the second quarter. Though the gold mines’ woes occupy far more public space, they actually increased production marginally, as did the platinum mines.
The third major contributor to the fall in GDP was agriculture, which is reeling from a drought this year.
The mining industry is aiming to announce its latest social pact tomorrow after horse trading on the exact bargain around retrenchments dragged on this week.
The latest draft version of the declaration is expected to mostly call for delaying retrenchment decisions, and mobilising state and corporate resources to help those mine workers who do end up getting fired.
Potentially radical proposals – such as getting platinum adopted as a reserve asset by the exceedingly large reserve banks of South Africa’s Brics partners (Brazil, Russia, India, China) – make it in at the end with very little elaboration.
Meanwhile, the department of trade and industry on Friday confirmed the approval of the first set of tariffs on steel imports – mostly coated-metal products.
This follows increasingly desperate pleas from the major steel makers for protection against apparently heavily subsidised Chinese steel products flooding the market.
Friday’s tariffs, however, only cover about 15% of steel imports and stem from the first of a number of applications for protection out of the steel sector that were lodged in September last year.
In the first half of this year, South Africa imported about 150 000 tons of products under the eight headings now getting the tariff – a 35% jump over last year.
Despite that, these tariffs do not really touch on the products where imports have made the most spectacular inroads, largely flatsteel products.
Ten more applications are in the works, according to the International Trade Administration Commission’s spokesperson, Foster Mohale. All but two of them are from Amsa, with Evraz Highveld as well as the SA Iron and Steel Institute also lodging one each. Collectively, these applications would cover just about all primary steel products made locally.
A number of other applications have since been made covering more of the steel industry, some as recently as last month.
The almost yearlong lag between an application and a tariff decision is pretty normal by international standards, says Henk Langenhoven, in-house economist at the Steel and Engineering Industries Federation of Southern Africa (Seifsa).
The 10% tariff, the maximum allowed under South Africa’s commitments to the World Trade Organisation, comes with some major strings attached, however.
These did not seem to have been collectively ironed out before government made its announcement.
Amsa’s spokesperson, Rio Matlhaku, replied to queries with an emailed response, saying the company “has noted the statement from Minister of Trade and Industry Dr Rob Davies”.
“Once the company has considered the full statement, we will be in a position to issue a more detailed statement.”
With Amsa hoping to get tariff protection for just about everything it makes, the terms being set could severely affect how it runs in coming years.
First and foremost, local manufacturers will not be allowed to exploit the tariff wall to raise their prices.
The official statement says that “there will be no price increase ... as a result of this tariff adjustment and that preexisting commitments to reduce prices on some products are honoured”.
The two applicants, Amsa and Safal Steel, had to make promises about future capital expenditure, of R250 million and R300 million, respectively, and safeguards are being built in to scrap the tariffs if they hurt the downstream sectors that have benefited from cheap Chinese steel.
According to Mohale, Itac has, for five years now, made tariffs conditional on “reciprocal commitments, including on production, investment and jobs”.
The last point is probably the crucial one, as it makes no sense – from the government’s point of view – to protect the basic steel makers only to have the more valuable manufacturing industries pay for it.
According to Langenhoven, it is unclear exactly how future price increases would be judged to be illegitimate. Seifsa has advocated a more thoroughgoing tariff wall to protect more advanced steel-using sectors.
“The hi-tech stuff is even more subsidised than the primary steel, including by the Europeans,” he claimed.
South African tariffs do not affect European imports because of a standing free trade deal.
% It was the best of times for Woolies, the worst of times for Malmart.
A tale of these two retailers’ results – Woolworths and Walmart’s Massmart – directly reflects the relative financial health of their respective customers.
Woolworths, which targets upperincome consumers in South Africa and Australia, where it spent more than R25 billion acquiring the high-end David Jones store chain, reported a 24% rise in profit to R3.75 billion on a 42% increase in sales to R56.5 billion.
Massmart, the second-largest distributor of consumer goods in Africa, which owns local general consumer brands including Game, Makro and Builders Warehouse, said interim profit for this year fell 26%, to R269.3 million, on sales that rose 9.1%, to R39 billion. Massmart operates 302 stores in South Africa and 12 others in sub-Saharan countries.
Both retailers acknowledged that South Africa’s high unemployment rate of 25%, electricity instability and a declining economic climate were making things tougher for consumers.
But Woolworths chief executive Ian Moir is counting on the continuing relative economic comfort of his core customers when he predicts that the retailer will gain market share, while lower commodity export prices can be expected to curb growth in South Africa and Australia.
“The upper-income consumer in both regions should remain relatively resilient,” he said.
Woolworths shares, which climbed 24% this year, slid 2.3%, to R96.60, at midday in Johannesburg on Friday.
The stock is still the best-performing major retailer on the FTSE/JSE Africa General Retailers Index.
Massmart blamed a fall in general consumer confidence – to a 14-year low – in the second quarter and increasing strong competition for its declines.
“All participants – suppliers, service providers, retailers and wholesalers – are competing keenly for profitability and market share,” it said.
“This is causing heightened margin pressure across the retail value chain.”
The company made a net foreign exchange loss of R106.7 million, “mostly as a result of the weakening of the average basket of African currencies against the rand”, it said.
The weakening of the local currency against the US dollar made the loss worse.
Massmart shares have decreased by 19% this year, the biggest decliner on the FTSE/JSE Africa General Retailers Index.
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