Impact of steel price on Manufacturing Industry: public hearings

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Trade, Industry and Competition

11 October 2010
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee held public hearings looking at the impact of the price of steel. It welcomed presentations from Professor Don Ross from the University of Cape Town, representatives of the South African Fruit and Vegetable Canning Industry and the South African Institute of Steel Construction.

The Dean of the Commerce Faculty at the University of Cape Town said the pricing of steel used for can manufacturing by ArcelorMittal South Africa, which enjoyed a monopoly in the industry, was excessive and was comparatively beyond world basket pricing in that industry. He explained the rise in the prices of tinplate and cans in South Africa and how those compared on a global scale. He asserted that due to South Africa’s relatively small steel market the increase in prices of steel would disadvantage the local market. Yet the SA prices had no discernable impact on the world steel market. Prof Ross advocated for smarter, more impactful policies from government when dealing with industries where there was potential for monopoly businesses to squeeze already under-pressure customers.    

The SA Fruit and Vegetable Canning Industry presented its views on the impact of steel prices. It highlighted the importance of creating more market access and effectively dealing with the hike in steel prices. The industry was strongly export driven and a large percentage of its income came from exporting canned goods. There was a need for industrial policy intervention and for private public partnerships to sustain the industry. It asserted that ArcelorMittal South Africa was monopolising the industry of tinplate production and that Nampak controlled 85% of the can making industry. The submission highlighted the negative impact of hiked steel prices and the problems they would cause with regard to employment, the ability to export goods and the ability to compete on a global level.

The South African Institute of Steel Construction gave a submission on the adverse effects of the raising of steel prices. It highlighted the importance of steel and its uses and the various works that the SAISC had a role in on an international scale with widely recognized buildings and bridges. The Institute presented its concerns over the increase of foreign companies coming into South Africa and ‘dumping’ steel at lower than competitive pricing. The Institute sought more protection from the government in order to sustain the steel industry in the country. More needed to be done by government to ensure its growth.    

Members asked for suggestions from the presenting stakeholders on how to alleviate the problems facing the canning industry. They asked about the number of countries using the basket system of pricing, what should be done to increase competition in the canning industry, why the figures presented were estimates and not derived from the source. They queried the trade deal between South Africa and the European Union with respect to duty free imports to South Africa.

Questions were raised about the sustainability of employment garnered in the agricultural sector and how that employment compared to international standards. The Committee asked what measures could be taken to protect the steel industry. They asked if the Department was following the purchase of a steel producing company in Zimbabwe and if steel that was exported was done so in its raw form. Comment was sought form the Department on the allegation made by the South African Institute of Steel Construction that some foreign steel companies were ‘dumping’ steel at lowered prices.

Meeting report

Professor Ross submission
Professor Don Ross, Dean of the Faculty of Commerce at the University of Cape Town, presented the Committee with comparisons of South African steel can pricing in comparison to world steel can and tinplate pricing. Prof Ross explained that because South Africa’s steel can market was not highly developed, its pricing variations had no effect on a global scale. He explained that in comparison to world markets, the can steel prices implemented by ArcelorMittal South Africa were higher and thus stifling South Africa’s export market.

85% of output from the canning industry was exported, with Europe and Japan as the largest destinations. The industry directly employed about 11,000 people, and indirectly employed another 18,000.The premium product was highly competitive and profitable, but it depended on economies of scale from mass market production. To be viable, the industry had to be able to see its mass market product above cost.

The industry had been suffering from under-investment for several years. The main reasons for this were tariffs imposed by the European Union, recurrent periods of Rand strength and the high price of cans. The industry could not be profitable in periods when it experienced all three of these problems at once.

The can was the single largest item in the cost of producing a can of fruit – about 30%. AMSA produced about 60% of the steel used in making tinplate for SA cans of fruit. The remainder was imported.  The price of tinplate was raised by 68.9% in April 2009, resulting in a 40 % to 45% increase in the price of cans. The co-occurring rise in the Rand amplified this. A 45% to 55% increase in the price of cans raised canned fruit production costs by about 15%.

SA’s steel market was too small to influence global terms of trade in steel or steel-based prices.
Therefore, import parity pricing was simply suppression of an aspect of comparative advantage.

Prof Ross stated that in his view, the AMSA prices were 8% above what they should be. He therefore asserted that AMSA was overpricing its steel. He advocated for a wiser and more prudent approach from government when drafting legislation that dealt with industries where the potential for monopolies to form was present. 

South African Fruit and Vegetable Canning Industry Presentation
Jill Atwood-Palm, General Manager: South African Fruit and Vegetable Canning Industry (SAFVC) spoke about the industry’s concern over raised steel prices and their adverse effect on the industry. 

The industry was strongly export-driven, especially in the fruit sector where 85% of SA production was exported. SA accounted for approximately 8% of world export fruit. The industry was valued at R5 billion with fruit export value accounting for R2 billion. In the long term, the industry would aim to improve market access, competitiveness, marketing and transformation through private public partnerships.

The industry asserted that ArcelorMittal South Africa was monopolising the industry of tinplate production and Nampak controlled 85% of the can making industry. As a result of this, not much room was left for the industry to negotiate on the prices of steel or tinplate.

The current model of pricing was based on the basket/benchmark pricing. This averaged out in US dollar based prices across a basket of 8 countries (5 developed and 3 developing). It translated on a monthly basis against the South African Rand to US dollar exchange rate presenting an unfair pricing structure which charged global prices for SA based products (with lower local production costs than most countries), and on 1 April 2009, tinplate prices increased by 68%.

AMSA produced SR-plate tinplate where most markets had moved on to DR-plate which was of a thinner metallic volume and cheaper to purchase. The impact of increases passed onto the consumer in the SA market resulted in the decline of consumer demand, and a surge of imports into the local market. The South African industry could not compete, with some products originating from countries that enjoy duty-free access into SA (EU bloc).

The effects of hiked prices on the export market were that there was no room to pass on increases in export markets, the
SA industry was largely a price-follower in global markets and the result was that the industry became non-competitive. Margins were completely eradicated leading to drastically reduced export returns which in turn led to a reduced manufacturing base.

Signs that the industry had taken a knock had manifested in the non-resumption of canning operations in the local pineapple industry due to the cost of cans. A major international company had disinvested in South Africa. SA canners were exploring all options to remedy uncompetitive cost structures through mergers. There was a marked reduction in fruit intake
and the massive investment of industry was under threat.

The industry suggested f
air and competitive steel/cans pricing structure, technological improvements with regard to tinplate (such as DR-plating) and can innovation, increased competition in steel/can-making. It suggested an investigation into the feasibility of own can-making facilities and support for the importation of tinplate and/or cans. This was in order to correct the injustices of the current pricing structure.

Mr B Radebe (ANC) asked Prof Ross for suggestions to alleviate the problems in the steel industry. He liked the suggestions from the canning industry. He asked what should be done to increase competition in the industry. Which countries used the basket pricing system to price their steel? 

Prof Ross responded that in most countries, pricing was decided by companies. AMSA was a global player with an interest in global pricing but South Africa’s steel can market was small in global terms therefore the pricing should be fairer. That did not mean however that the pricing could be dictated to AMSA, unless the political economy policy changed significantly. The direct importation of cans could be a viable option for the canning industry to add competition and avoid AMSA’s high prices.

Nassos Martalas, Executive Director and Chief Operating Officer of Langeberg & Ashton Foods replied that a more aggressive application of industrial policy was needed to keep the industry viable.

Ms C Kotsi (COPE) asked how Prof Ross came to the conclusion that AMSA had not reduced its pricing sufficiently when it undertook price reduction. She asked why it was difficult to access figures and information from AMSA, making it necessary to use estimates. She asked Department of Trade and Industry (DTI) why the European Union enjoyed duty free importing to South Africa. She asked about job losses in the Eastern Cape as a result of the industry halting operations there.  

Prof Ross replied that the estimates were gathered using publicly accessible pricing figures from 2008/9 and compared to global prices of the same product and global basket pricing. Pricing could be calculated by comparison and research, granted you had an ample workforce, and standard and reliable methodology. The information on prices could not be divulged by companies as they were entitled to protect proprietary information.

Mr Martalas added that the responsibility of producing a report on employment trends was incumbent on the industry and would be undertaken in a written response to the Committee. He agreed with Prof Ross that pricing was not the only problem faced by the industry.

Mr Nimrod Zalk, Deputy Director General: Industrial Development Division, DTI, replied that the deal with the EU was not perfect but that Europe was one of the biggest trading partners South Africa had in the sector of canned fruit therefore access to those markets was vital for the industry.  

Mr A Alberts (FF+) asked what were the resources used to garner the figures of steel pricing and how the Committee could assist in helping to garner more accurate figures from AMSA itself.

Prof Ross referred to his previous answer to Ms Kotsi. The statistics were garnered through reliable methods and could be trusted. 

Ms C September (ANC) asked whether the pricing of steel was the biggest problem faced by the industry or whether that issue was impactful when considering other problems facing the industry. She requested that the industry give the Committee a ten-year synopsis of job creation in the industry. She asked whether there were viable alternatives to cans in the process of packaging. She suggested that the Committee undertake an oversight visit to the SAFVC whenever possible.

Prof Ross replied that in his view, the problem was not simply the pricing of cans but all the other issues affecting the industry added to pricing. Simply altering the price of steel would not be sufficient to solve the problems facing the industry. There were alternatives to using cans in packaging but alternatives such as plastic and glass were more expensive and were used for higher end goods unlike fruits which were canned. 

Mr T Harris (DA) highlighted the fact that AMSA’s pricing hike may have been undertaken to break even with world basket pricing as AMSA had been below the basket for a period of time. He asked why the canning industry did not seek to purchase the tinplate brought in by foreign companies sold at a lower price than the can making industry locally was proffering. He asked what types of measures Prof Ross would suggest to assist industries that had monopolistic companies operating in them. He asked about a variation in the usage of cans with different thicknesses and whether the canning industry could use one type of can with one standard thickness. He asked if the industry had any comment on the consistency of the pricing by AMSA. He asked DTI if the Committee could do anything to intervene with regard to the basket of goods pricing. 

Prof Ross responded that AMSA’s incentives for pricing has been trending towards raising prices in spite of the global trend pricing formula, the country faced an industry problem.

Mr Martalas responded that the pricing basket used by AMSA was not agreeable to the industry as the South African market did not compete with the United States or Britain, which were countries used in the basket grouping. If a pricing basket was done with developing countries such as China, the comparison would be more founded and grounded.

Mr Zalk replied that more competition would be needed in the industry of can making and skill investment but noted that there were constraints in implementing a major shift in policy towards steel but that an interdepartmental task team was looking into means of improving the can making industry and pricing.  

Ms F Khumalo (ANC) asked what the sustainability of employment in the farming and manufacturing sectors were. She seconded the idea of an oversight visit as proposed by Ms September. 

Mr Martalas responded that a written response would be sent to the Committee. Ms Atwood-Palm reiterated that point. 

Mr M Oriani-Ambrosini (IFP) commented that there was a lack of policy coherence on matters pertaining to business and government’s role. There was a lot of contradictory rhetoric with regard to that issue and a clear policy direction needed to be settled upon to achieve results. He asked the industry what it suggested to try and fix the problems facing the industry. In creating policy, government should not try to please everybody as it stymied achievement and effective policies.

Mr Martalas replied that a more aggressive application of industrial policy was needed to keep the industry viable.

The Chairperson asked how the high employment figures noted in the SAFVC presentation compared to international standards. She asked what a Double-Reduced (DR) can was and why it could not be produced in South Africa. What would be the costs if the DR can was produced in South Africa.

Mr Martalas replied that a response on employment would be sent to the Committee in writing. The DR was not produced in South Africa because it was more expensive to make but cheaper to sell thus it was not lucrative enough for a company like AMSA to produce DR-cans.

South African Institute of Steel Construction submission
Mr Hennie de Clercq, Executive Director: SAISC, presented the Committee with the Institute’s views on steel pricing and issues affecting the industry.

Steel price comprised 40% of the value of fabricated structural steel as a product. The cost of the primary steel price typically constituted 2% to 8% of final project value. Domestic competition had little practical effect on structures; however international competitiveness had a major effect. Tube & pipe, bolts, roof cladding etc was price sensitive due to imports and substitute products from other materials. 

The local industry had done well until 2008 when it had invested heavily in extra capacity. Government spending in 2008 was stopped except on power stations, the mining industry was in limbo because of uncertainty while South America blossomed. The strong and volatile Rand detered exports leading to a loss of jobs, companies going bust, closing of facilities.

Steel price was one of the determinants of a successful steel construction industry, but many other factors had a larger negative influence:

Domestic competition was on a level playing field for structural steel but certain products experienced competition from imports and other materials
Export was a prime growth opportunity
Steel prices had a major influence on exports also price fluctuations and R : $ exchange rates
International competitors enjoyed assistance and protection
SA industry had little assistance or protection.

The Institute recommended that the government create
a favourable environment for investments in RSA projects. The mining industry should be supported more through policy, the government should seek ways to support exports by the downstream industry, and also through steel pricing. One should protect the industry against imported products (duties) and projects (legislation). Strengthen interdepartmental co-operation, establish fast track decision making and involve industry associations in decision making on issues affecting the industry.

Mr Alberts asked what recommendations the Institute would make on supporting the mining industry specifically with a view to legislative proposals.

Mr Kobus De Beer, Industry Development Executive: SAISC, replied that SAISC had learned from Brazil. The investment in the mining industry there was substantial and showed to be greatly beneficial to that country’s mining sector. As such, SAISC was hoping for the same manner of investment in South Africa’s own mines so as to further the industry and by osmosis assist the steel industry. 

Mr Harris asked whether SAISC knew about the re-importing of steel agreement. He asked whether there were structural constraints preventing the exportation of steel to borders outside of Africa. He asked the DTI whether the Department was aware of the sale of Zimbabwe Iron and Steel Company (ZISCO) and what could be done to prevent the ‘dumping’ of steel by foreign companies at low prices. He asked when the interdepartmental task team’s report would be completed.

Mr De Clercq replied that he was not aware of the re-importing agreement.

Mr De Beer replied that there were no constraints preventing the exportation of steel outside Africa.

Mr Zalk replied that the Department was aware of the sale of ZISCO and did not play a part in the purchase of the body. The department would have to look at how to use tariffs intelligently and how to utilise incentives in order to counteract the problem of ‘dumping’.

Ms September asked whether the steel that was exported was exported in its raw form. She asked for more elaboration on problems affecting the industry. She asked what the unfavourable problems were that affected the industry. 

Mr De Clercq said that the steel that was exported was done so in its final form after production. The problem of ‘dumping’ of steel at lower prices by Chinese and Indian companies was of real concern and those companies seemed to have subsidies from their countries which allowed them to do so.

Mr Radebe commented that the industry needed further support from the Committee and government to assist it in facing its problems. He asked what SAISC meant when they said that the mining industry was ‘in limbo’.

Mr De Beer responded that not enough support or investment was being put into mines in South Africa and as a result there was less growth in the country’s mines as opposed to other mines such as in Brazil or other developing countries.

Mr X Mabaso (ANC) asked for elaboration on the comment on the mining section being ‘in limbo’. 

Mr De Beer referred to his previous answer.

The meeting was adjourned.


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