Scrap metal workers at Vulindlela Heights, Mthatha. Picture: THE TIMES
Scrap metal workers at Vulindlela Heights, Mthatha. Picture: THE TIMES

WHILE everyone else was preparing for the Christmas holidays last year, the International Trade Administration Commission was hard at work, setting out measures that would complicate the existence of scrap metal exporters. On December 11, it published punitive amendments to the price preference system governing scrap metal exports, leaving only four weeks for interested parties to respond.

This clearly signalled the commission’s intent to crack down on such exports in the face of little public input. The deadline was extended to February 5, but the proposed changes remain on the table.

The system compels domestic scrap metal exporters to first offer their stock to domestic "consumers" — large metals fabricators or small-scale foundries — at a substantial discount to the export price of 10%-30%, depending on the metal and grade.

Exports are also subjected to onerous export licensing procedures, administered by the commission. It is the latter that the latest regulations seek to tighten.

In the context of the steel industry crisis, globally and domestically, it is easy to see why the government is looking to find any means possible to preserve domestic jobs in the metals fabrication sector. However, it is baffling why the commission is looking to tighten a system that is patently not delivering results. For example, due to the sustained decline in export prices — which means that domestic and export prices are converging — the system’s mandatory price discounts are not being achieved.

This situation is likely to persist due to depressed international conditions.

Furthermore, annual domestic demand for scrap metals exported by our members amounts to a maximum of 2-million tonnes, whereas the new supply of scrap metals generally exceeds 3-million tonnes.

The annual surplus of 1-million tonnes needs to be exported to willing buyers to avoid the substantial environmental hazards associated with "scrap metal mountains" building up. Yet the effect of the commission’s regulatory changes, if approved, would be to kill most scrap metal exports overnight. Indeed, that is the intention, if the declarations from last year’s high-profile steel crisis summit are to be taken at face value.

Consider the proposed regulation that would require scrap metal exports to be routed only via approved routes, and only through Port Elizabeth. None of our members — 100 scrap metal processors processing more than 80% of domestic scrap — is based in Port Elizabeth. Scrap metal exporters prefer to export via Durban because of the latter’s relative proximity to the major sources of supply on the highveld, and associated transport economics.

That assumes an export permit would be granted, not a safe assumption. An exporter would be allowed to apply for a new permit only once the previous permitted transaction had taken place, a regulation that would greatly complicate cash flow and contribute to escalating scrap metal "mountains". Export permits would be conditioned on unspecified black economic empowerment criteria, leaving wide room for interpretation and arbitrary denial of permits.

There would be broader economic consequences should regulations be adopted.

Annual exports of about R6bn could cease. Decreased output would also negatively affect SA’s gross domestic product, to which the scrap metal sector contributes about R15bn-R20bn annually. At a time of rating downgrades, strained export proceeds and yawning current account deficits, it is difficult to see how these results would advance SA’s interests.

Second, employment in the industry would undoubtedly suffer, in two ways. Directly, as the affected companies close down export production lines and lay off workers. This would affect about 15,000 people formally employed in the industry, and would come on top of already significant job losses in the sector.

Indirectly, the consequences for informal workers, at the bottom end of the value chain, would be more severe. No one knows for sure how many people would be affected, with guesstimates varying from 250,000 to 400,000, not to mention their dependants. The fact that they are not organised, and therefore, have not been consulted in any of the initiatives designed to favour the steel industry, speaks volumes for the way in which the government takes decisions, and to whom it gives consideration.

Third, companies and organisations that participate in the scrap metal export business would also be affected negatively. The road freight hauliers, who rely on scrap metal exports to fund the return of containers from inland provinces, especially Gauteng, would lose valuable revenues. And the Port of Durban would lose a valuable customer group.

Exports would be destroyed; thousands, potentially tens of thousands, of jobs lost, directly and indirectly; output and, therefore, taxes would be reduced; associated industries, including the government itself, would lose out; and an environmental hazard would emerge and grow.

What is the gain? Entrenching a system that doesn’t work, purportedly to promote value-added production in a sector — domestic metals fabrication — where jobs are scarce, structurally threatened and unlikely to return should global steel market conditions persist, which seems likely — does not seem to be a bargain in the "national" interest.

On top of this, the heavy-handed interventions being proposed infringe on our members’ rights in various ways, notably their right to just administrative treatment. They may also breach international trade agreements, particularly those pertaining to export restrictions and freedom of transit for scrap metals sourced from our neighbours. And they raise troubling issues for other industries that the government regards as somehow "illegitimate".

So much for the government and business now working together.

Nonetheless, we are committed to working with the government to find mutually agreeable solutions.

An alternative path is foreseeable, but requires difficult decisions from a range of actors. We have two proposals.

First, the government should scrap the price preference system and replace it with an export levy (found in the diamond industry), set at reasonable levels, on all scrap metal exports. While not without their problems, export taxes or levies can be an efficacious industrial policy tool to support downstream activities.

This would be consistent with the government’s overall policy rather than clinging to a failed system.

Second, and at the same time, government should introduce an act to regulate the scrap metal industry, designating an industry body to enforce collectively agreed norms and standards with a view to also tackling widespread criminality in the entire value chain.

This body could be funded from the proceeds of the export tax or levy.

This shared responsibility approach would be far preferable to the current heavy-handed, and highly counterproductive approach that threatens to throw out the baby with the bath water.

• Starkey is chairman of the Metal Recyclers Association