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With steel protection set to widen, focus turns to downstream risk

Source: Creamer Media's Engineering News Date: 11 February 2016

With confirmation that government and the steel industry are close to finalising a package of measures designed to preserve the future of the embattled primary steel sector, there are concerns that domestic steel consuming industries could be squeezed between tariff-protected domestic steel prices and sustained import competition.

In a statement, the Department of Trade and Industry stressed that the “comprehensive package”, which includes additional protection for steel producers, would also be designed to protect downstream users and employment across the value chain. However, it remains unclear how that balance will be struck, with a number of metals and engineering companies having already cautioned that they will come under additional strain should ArcelorMittal South Africa (AMSA) and Evraz Highveld Steel and Vanadium prevail in their applications for 10% basic protection and, on certain steel grades, far higher levels of ‘safeguard’ duties.

The International Trade Administration Commission of South Africa (Itac) has already increased duties to the 10% level on three steel product lines and is considering eight more applications, as well as five safeguard duty applications.
Steel and Engineering Industries Federation of Southern Africa (Seifsa) CEO Kaizer Nyatsumba is sympathetic to the current plight of the steel producers, which are struggling to navigate a market in serious over supply, a slump in prices and a flood of subsidised Chinese imports.Conditions are so hostile that South Africa’s second-largest steel producer, Highveld stopped operations in July and has entered business rescue, while AMSA is about to report a 2015 loss that is more than 5000% worse than its 2014 loss.

However, Nyatsumba stresses that interventions to shore up the primary steel industry cannot come at the expense of a downstream metals and engineering industry that is facing its own market headwinds.

“We would like to see a situation where there is common cause between the key stakeholders of government, business and labour on what needs to be done to arrest the situation and protect jobs in the metals and engineering sector.”

Seifsa has supported the primary producers in calls for greater protection, with the caveat that such protection cannot be at the expense of downstream manufacturers. “It serves very little purpose to protect one sub-sector of the metals and engineering sector and hurt the others.”
AMSA’s outgoing CEO Paul O’Flaherty acknowledges the risks faced by downstream consumers. However, he argues that the biggest threat to these enterprises is not the package of protective measures being put in place, but rather the importation of steel-intensive products. It is understood that Itac has already reviewed the scope, within South Africa’s World Trade Organisation commitments, for further protecting certain downstream sectors and it is anticipated that various applications for protection will be submitted. There is a concern, though, that the downstream sectors are less organised than the primary producers, which could result in a material lag between the institution of upstream duties and the approval of protection of steel-consuming industries

Another imponderable is the effect of AMSA’s future pricing policy, which will have a significant bearing on the viability of the company, but will also affect consumers. O’Flaherty has indicated that the model being canvassed with the Economic Development Department and the Department of Trade and Industry is advanced, but that the details remain confidential.

However, he has indicated that the pricing formula is likely to be limited to the flat-steel market, where AMSA is the dominant market participant. “That’s where we need to make sure that you are not going to have a price that is out of sync and unfair to the downstream,” he explains.

Government has already pointed out that South Africa is not unique is seeking to protect its primary producers, highlighting that both developed and developing countries have already implemented similar tariff protection measures.

It also acknowledges the importance of ensuring that such protection does not result in higher steel prices being “passed on to downstream, steel-intensive manufacturing sectors”.

“These sectors are labour intensive and any measures, which might erode the competitiveness of secondary steel intensive manufacturers, must be avoided. It is for this reason that government is very carefully weighing up the basket of measures under consideration and is consulting widely with all stakeholders, the downstream users included,” Trade and Industry Minister Dr Rob Davies has said.

Davies adds that government is confident that agreement will be reached in this regard. “Once final agreement is reached an announcement setting out the package of measures to be adopted, in addition to those already implemented, will be made.”

With confirmation that government and the steel industry are close to finalising a package of measures designed to preserve the future of the embattled primary steel sector, there are concerns that domestic steel consuming industries could be squeezed between tariff-protected domestic steel prices and sustained import competition.

In a statement, the Department of Trade and Industry stressed that the “comprehensive package”, which includes additional protection for steel producers, would also be designed to protect downstream users and employment across the value chain. However, it remains unclear how that balance will be struck, with a number of metals and engineering companies having already cautioned that they will come under additional strain should ArcelorMittal South Africa (AMSA) and Evraz Highveld Steel and Vanadium prevail in their applications for 10% basic protection and, on certain steel grades, far higher levels of ‘safeguard’ duties.

The International Trade Administration Commission of South Africa (Itac) has already increased duties to the 10% level on three steel product lines and is considering eight more applications, as well as five safeguard duty applications.
Steel and Engineering Industries Federation of Southern Africa (Seifsa) CEO Kaizer Nyatsumba is sympathetic to the current plight of the steel producers, which are struggling to navigate a market in serious over supply, a slump in prices and a flood of subsidised Chinese imports.Conditions are so hostile that South Africa’s second-largest steel producer, Highveld stopped operations in July and has entered business rescue, while AMSA is about to report a 2015 loss that is more than 5000% worse than its 2014 loss.

However, Nyatsumba stresses that interventions to shore up the primary steel industry cannot come at the expense of a downstream metals and engineering industry that is facing its own market headwinds.

“We would like to see a situation where there is common cause between the key stakeholders of government, business and labour on what needs to be done to arrest the situation and protect jobs in the metals and engineering sector.”

Seifsa has supported the primary producers in calls for greater protection, with the caveat that such protection cannot be at the expense of downstream manufacturers. “It serves very little purpose to protect one sub-sector of the metals and engineering sector and hurt the others.”
AMSA’s outgoing CEO Paul O’Flaherty acknowledges the risks faced by downstream consumers. However, he argues that the biggest threat to these enterprises is not the package of protective measures being put in place, but rather the importation of steel-intensive products. It is understood that Itac has already reviewed the scope, within South Africa’s World Trade Organisation commitments, for further protecting certain downstream sectors and it is anticipated that various applications for protection will be submitted. There is a concern, though, that the downstream sectors are less organised than the primary producers, which could result in a material lag between the institution of upstream duties and the approval of protection of steel-consuming industries

Another imponderable is the effect of AMSA’s future pricing policy, which will have a significant bearing on the viability of the company, but will also affect consumers. O’Flaherty has indicated that the model being canvassed with the Economic Development Department and the Department of Trade and Industry is advanced, but that the details remain confidential.

However, he has indicated that the pricing formula is likely to be limited to the flat-steel market, where AMSA is the dominant market participant. “That’s where we need to make sure that you are not going to have a price that is out of sync and unfair to the downstream,” he explains.

Government has already pointed out that South Africa is not unique is seeking to protect its primary producers, highlighting that both developed and developing countries have already implemented similar tariff protection measures.

It also acknowledges the importance of ensuring that such protection does not result in higher steel prices being “passed on to downstream, steel-intensive manufacturing sectors”.

“These sectors are labour intensive and any measures, which might erode the competitiveness of secondary steel intensive manufacturers, must be avoided. It is for this reason that government is very carefully weighing up the basket of measures under consideration and is consulting widely with all stakeholders, the downstream users included,” Trade and Industry Minister Dr Rob Davies has said.

Davies adds that government is confident that agreement will be reached in this regard. “Once final agreement is reached an announcement setting out the package of measures to be adopted, in addition to those already implemented, will be made.”

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