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

CityPress - - Business - DEWALD VAN RENS­BURG dewald.vrens­burg@city­press.co.za PETER DE IONNO peter.deionno@city­press.co.za

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.

Re­ces­sion likely

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.

Mines pact

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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).

Pro­tec­tion

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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