Minister of Trade and Industry on Inter-Departmental Task Team on Iron and Steel (IDTT) summary report & Review of Bilateral Investment Treaties in South Africa Review update

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Trade and Industry

14 February 2013
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Minister of Trade and Industry and departmental officials briefed the Committee on the Iron and Steel Inter-Departmental Task Team on Iron and Steel (IDTT) Summary Report and the Review of Bilateral Investment Treaties. The Minister noted that Iron and Steel was a major industrial component, but the country’s resources were not being used sufficiently to support the local manufacturing sector. Resources above the ground also needed to be exploited especially scrap metal.   However the potential of criminal activities in the scrap metal industry was worrying and tough measures were being implemented in order to prevent crime. The Task team was looking at all of this including the historical ownership problems involved with the South African Iron and Steel Industrial Corporation (ISCOR).  The Minister pointed out that he had met with senior management from ArcelorMittal and noted that more steel makers were needed in South Africa.

The DTI reviewed the IDTT background, Iscor / Kumba Resources unbundling, the final agreements approved by Cabinet in December 2012, and the implementation progress. South Africa had the largest mineral resources in the world, excluding oil, with an estimated value of $2.5 trillion. Despite this, no competitive advantage accrued or was passed on to domestic manufacturing. Historical competitive advantages no longer applied. AcerlorMittal South Africa (AMSA) accounted for 75% of domestic steel production, and enjoyed market dominance but its pricing strategy had not been in support of downstream manufacturing. High international prices had fuelled a massive unimpeded expansion of scrap metal exports. This had negatively impacted upon supply to domestic scrap processing industries. An Inter-Departmental Task Team (IDTT) on the iron ore and steel value chain was established in April 2010. The IDTT was composed of the Department of Trade and Industry (the dti), the Department of Mineral Resources, the Department of Public Enterprises and the Economic Development Department.

In December 2012, Cabinet approved a final set of policy instruments that sought to ensure the long term viability of the iron ore and steel value chains to create a competitive advantage for the local manufacturing sector. The Economic Development Department was to begin a process in terms of the utilisation of the International Trade Administration Act (No. 71 of 2002) (ITA) to safeguard the supply of affordable scrap metal to domestic mills and curtail the abuse of scrap metal, including associated cable and metal theft. The amendment of the Competition Act (No. 89 of 1998) was also being processed by the Economic Development Department to ensure that iron ore price concessions were passed onto the downstream industry. Finally, the Industrial Development Corporation (IDC) was to fast-track new steel investments in order to strengthen competition in the steel sector. The Department of Mineral Resources would amend Section 26 of the Mineral and Petroleum Resources Development Act to align with national priorities related to minerals for local beneficiation. The International Trade Administration Act required an export permit for exporting scrap metal and confirmation that the exporter had complied with the Second Hand Goods Act (No. 6 of 2009). It was proposed that scrap metal should not be exported unless it had first been offered to domestic users at a price determined by the International Trade Administration Commission (ITAC).

A DA Member said that if AMSA were unsuccessful steel production would be cut. How would a steel pricing model affect the viability of AMSA? An IFP Member said that it was easy to conceal proceeds from crime making it easy for them to be smuggled outside of the country and that the government had a tendency of trying to solve unsolvable problems. A COPE Member noted that a developmental policy involved the industrialisation of the state. Beneficiation, contrary to the impression given by the Minister, was not new. He was dismayed at the privatisation of Iscor and noted that its being taken over by foreigners was not in the country’s best interest. The government must exercise its mandate and govern. There was a lack of policy implementation on the part of government. He urged the Minister and Cabinet to start governing the country. An ANC Member applauded the State of the Nation Address delivered by President Jacob Zuma. The issue of a developmental state was critical. Steel could be recycled but it was not good to export scrap steel and if necessary there should be a moratorium to stop its export.

The Minister acknowledged that AMSA was not in a good financial situation. He said there was uncertainty in terms of the steel price but government was uncompromising that it would not increase steel prices. Iscor was privatised and unbundled at the dawn of democracy. The lesson from this was that when deals were done during privatisation obligations needed to be made binding on parties; these obligations needed to be measurable and deliverable. Fiscal policies were necessary to encourage scrap metal dealers to trade locally. The onus would be on scrap metal owners to prove to customs officials that scrap metal did not contain gold or other proceeds from criminal activities.  Plenty of measures were being taken to support local entrepreneurs in terms of the Black Economic Empowerment (BEE) code. He agreed that beneficiation was not new but there were different stages of value addition. Value addition was crucial for the creation of employment and development of the state. The platinum group was one area where beneficiation was possible before the final products were exported. Beneficiation could support industrialisation. South Africa needed to get more value from minerals. Kumba followed the Mining Charter but there was some industrial relations problem that needed to be examined.

The Department updated Members on the Review of Bilateral Investment Treaties (BITs) in South Africa. Bilateral Investment Treaties had signalled South Africa’s re-entry to the International community after years of isolation.  Investor-state dispute settlement/arbitration, however, remained a contentious issue. New BIT agreements had been reached with US and Canada, while Brazil had refused to enter into BITs. New generation BITs sought to reduce risks inherent in earlier agreements through more precise drafting provisions. A new approach secured the right of government to regulate BITs in public interest such as health and environmental issues. Human rights issues were also contextualised in local investment protection. It was pointed out that there was no clear relationship between BITs and increased foreign direct investment inflows. In July 2010 Cabinet decided that work should begin to modernise and strengthen South Africa’s investment protection legal framework. Cabinet recognised that the relationship between BITs and foreign direct investments was ambiguous and that BITs posed risks and constrained Government ability to regulate in the public interest. Currently South Africa participated actively in international dialogue on investment treaty making. Currently work was in progress on the draft Foreign Investment Bill to update, modernise and strengthen investor protection in South Africa.

A DA Member asked about protection of South African investors elsewhere in the world. A COPE Member asked about the unilateral ending of BITs and the effect on South African farmers investing across Africa. The Chairperson asked about the development of the draft Foreign Investment legislation.

The Minister welcomed comments and noted that communication was crucial and the Department would take that into cognisance. The Department was prepared to negotiate with African countries and the agreement with Zimbabwe did not cover retrospective land grabs.  The draft Foreign Investment Bill work was advanced and would provide security and protection to all investors. He noted that the foreign investment pipeline in South Africa remained in place and it remained a safe investment destination. The government would continue assisting investors. The investment protection regime was intended to create inclusive growth and employment in South Africa.

Meeting report

DTI Summary Report of the Inter-Departmental Task Team on iron and Steel (IDTT)
The Minister of Trade and Industry, Dr Rob Davies, noted that Iron and Steel was a major industrial component. However, the country’s resources were not being used sufficiently to support the local manufacturing sector. The Minister also highlighted that the richest deposits of iron ore were located in the Northern Cape and had almost 25 years of output. Resources above the ground needed also to be tapped into, mainly scrap metal.   However the potential of criminal activities in the scrap metal industry was worrying and tough measures were being implemented in order to prevent crime. The Task team was looking at all of this including the historical ownership problems involved with the South African Iron and Steel Industrial Corporation (ISCOR).  The Minister pointed out that he had met with senior management from ArcelorMittal and noted that more steel makers were needed in South Africa.

Mr Garth Strachan, DTI Acting Deputy Director-General: Industrial Development Policy Division, took the Committee through the summary report, reviewing the background, Iscor / Kumba Resources unbundling, the final agreements approved by Cabinet in December 2012, and the implementation progress.

Background
He noted that South Africa had the largest mineral resources in the world, excluding oil, with an estimated value of $2.5 trillion. Despite this, no competitive advantage accrued or was passed on to domestic manufacturing. Historical competitive advantages, especially low electricity prices, no longer applied.  An Import Parity Pricing (IPP) policy was practised by producers who enjoyed market dominance in key inputs into manufacturing – steel, plastics and polymers. AcerlorMittal South Africa (AMSA) accounted for 75% of domestic steel production. The company enjoyed market dominance and its pricing strategy had not been in support of downstream manufacturing. High international prices had fuelled a massive unimpeded expansion of scrap metal exports. This had negatively impacted upon supply to domestic scrap processing industries. (See slides 4-7).
 
Inter-Departmental Task Team (IDTT) on iron ore and steel value chain
An Inter-Departmental Task Team (IDTT) on iron ore and steel value chain was established in April 2010. The IDTT was composed of the Department of Trade and Industry (the dti), the Department of Mineral Resources, the Department of Public Enterprises and the Economic Development Department. The task of the IDTT included the development of a set of inter-related policy instruments to ensure the long term viability of the iron ore and steel value chain in support of increased levels of value addition to create a competitive advantage for the South African manufacturing industry. (See slides 9-10).

Iscor / Kumba resources unbundling
Iscor / Kumba resources unbundling was explained (slide 11)

Final set of policy instruments
In December 2012, Cabinet approved a final set of policy instruments that sought to ensure the long term viability of the iron ore and steel value chains in support of increased levels of value addition to create a competitive advantage for the local manufacturing sector. These policy instruments included: the fast tracking of legislation by the Department of Mineral resources to amend the Mineral and Petroleum Resources Development Act (No. 28 of 2002) to secure a competitive advantage. The Economic Development Department was to begin a process in terms of the utilisation of the International Trade Administration Act (No. 71 of 2002) (ITA) to safeguard the supply of affordable scrap metal to domestic mills and curtail the abuse of scrap metal, including associated cable and metal theft. The amendment of the Competition Act (No. 89 of 1998) was also being processed by the Economic Development Department to ensure that iron ore price concessions were passed onto the downstream industry. Finally, the Industrial Development Corporation (IDC) was to fast-track new steel investments in order to strengthen competition in the steel sector. (See slide 13)

Implementation progress
The Department of Mineral Resources would amend Section 26 of the Mineral and Petroleum Resources Development Act to enhance provisions and align with national priorities related to minerals for local beneficiation. It was also pointed out that the International Trade Administration Act required an export permit for exporting scrap metal. The applications for such a permit must be accompanied by a metallurgical certificate confirming the type, grade and quality of metal to be exported; and a certificate indicating that the metal was not stolen and that the exporter had complied with the Second Hand Goods Act (No. 6 of 2009) which was administered by the Minister of Police.

The Minister of Economic Development's draft directive set out the policy, including a price preference system, to regulate scarp exports. It was proposed that scrap metal should not be exported unless it had first been offered to domestic users at a price determined by the International Trade Administration Commission (ITAC).

The Economic Development Department was leading the process to make amendments to the Competition Act, including the case of the iron ore and steel value chain, to ensure that iron ore price concessions accruing to the primary steel industry were passed onto downstream users. The actual amendments would be finalised by June 2013.

An Industrial Development Corporation (IDC)-led pre-feasibility study on new steel investments had concluded that a new steel production facility could be established, which could effect a 10% reduction in the price of steel. International investors were ready to enter into a Joint Venture to establish such a facility. The detailed feasibility study (at a cost of about R350 million) was forecast to begin early this year and to take 18 months.
(See slides 15-23).

Discussion
The Chairperson thanked the Department for the presentation and pointed out that it was long- awaited and very critical.

Mr G Hill-Lewis (DA) asked about the financial performance of AMSA and pointed out that if AMSA was unsuccessful steel production would be cut. He also enquired how a steel pricing model would affect the viability of AMSA.

Dr M Oriani-Ambrosini (IFP) expressed concern about scrap metal at docks and noted that it was easy to conceal proceeds from crime making it easy for them to be smuggled outside of the country. He noted that the government had a tendency of trying to solve unsolvable problems.

Mr G McIntosh (COPE) noted that a developmental policy involved the industrialisation of the state. It was pointed out that beneficiation was not a new kid on the block as expressed by the Minister. The use of coal to generate electricity was a prime example of the existence of beneficiation. Sasol was started as a developmental project. It was also highlighted that the country’s national interests were served by a developmental agenda. He was dismayed at the privatisation of Iscor and noted that its being taking over by foreigners was not in the country’s best interest. The government must exercise its mandate and govern. There was a lack of policy implementation on the part of government. He urged the Minister and Cabinet to start governing the country.

Mr B Radebe (ANC) applauded the State of the Nation Address delivered by President Jacob Zuma. The issue of a developmental state was critical. Steel could be recycled but it was not good to export scrap steel and if necessary there should be a moratorium to stop its export. He asked how the Department was assisting black entrepreneurs in terms of business.

Minister Davies acknowledged that AMSA was not in a good financial situation. He said there was uncertainty in terms of the steel price but government was uncompromising that it would not increase steel prices. He said there were discussions in terms of the prices that can be set in South Africa.  Iscor was privatised and unbundled at the dawn of democracy. The lesson from this was that when deals were done during privatisation obligations needed to be made binding on parties; these obligations needed to be measurable and deliverable.

Consultation was key before the Executive could make decisions. Scrap metal was much more essential in the South African economy and fiscal policies were necessary in order to make it more favourable for scrap metal dealers to trade locally. The onus would be on scrap metal owners to prove to customs officials that scrap metal did not contain gold or other proceeds from criminal activities.  Plenty of measures were being taken to support local entrepreneurs in terms of the Black Economic Empowerment (BEE) code. He noted beneficiation was not new but there were different stages of value addition. Value addition was crucial for the creation of employment and development of the state. The platinum group was one area were beneficiation was possible before the final products were exported. Beneficiation could support industrialisation.

Mr Strachan noted that the Economic Development Minister had tabled draft guideline policies on the exportation of scrap metals.

Mr Hill-Lewis asked if government was considering preferential bulk electricity tariffs for AMSA.

Mr McIntosh asked on black empowerment deals. He also pointed out that the exporting of scrap metal to Asian markets was the same as exporting rhino horns in the sense that it was not in South Africa’s best interests. He also asked if the effect of the strikes at Kumba Iron Ore mine did not have a devastating effect on iron ore production.

Minister Davies noted that the discussions with AMSA would be open to all factors once the price for steel in the South African market had been determined. The example of exporting rhino horn and scrap metal was useful and it was a resource that must be utilised in South Africa. The issues affecting Kumba were in the realm of the Department of Mineral Resources but it was important to look at beneficiation and South Africa needed to get more value from minerals. Kumba followed the Mining Charter but there was some industrial relations problem that needed to be examined.

The Chairperson noted that the briefing was most welcome and further discussions would follow.

DTI Update on the Review of Bilateral Investment Treaties in South Africa
Mr Xavier Carim, DTI Deputy Director General: International Trade and Economic Development (ITED), took the Committee through the presentation on the Review of Bilateral Investment Treaties (BITs). It was noted that in the immediate post-apartheid era South Africa concluded 15 BITs mainly with European states. A review of the BITs (2007/10) had pointed to the fact that investment protection reviews had occurred in Australia, Brazil, Canada, Norway, USA and Sweden. There had been changes in terms of the definition of investor/investment; national treatment; most favoured nation; expropriation; fair and equitable treatment; compensation and transfer of funds.

However investor-state dispute settlement/arbitration remained a contentious issue. New BIT agreements had been reached with US and Canada, while Brazil had refused to enter into BITs. New generation BITs sought to reduce risks inherent in earlier agreements through more precise drafting provisions. A new approach secured the right of government to regulate BITs in the public interest such as health and environmental issues. Human rights issues were also contextualised in local investment protection. It was pointed out that there was no clear relationship between BITs and increased foreign direct investment inflows.

In July 2010 Cabinet took a decision that work should begin to modernise and strengthen South Africa’s investment protection legal framework. Cabinet recognised that the relationship between BITs and foreign direct investments was ambiguous and that BITs posed risks and constrained government’s ability to regulate in the public interest.

Currently South Africa participated actively in international dialogue on investment treaty making in the United Nations Conference on Trade and Development (UNCTAD) and in the Organisation of Economic Co-operation and Development (OECD). Investment protection was taken up in the Brazil, Russia, India, China and South Africa group of countries (BRICS) dialogue. There was ongoing engagement with the European Union and its members. Currently work was in progress on the draft Foreign Investment Bill to update, modernise and strengthen investor protection in South Africa.
(See presentation document)

The Minister noted that, according to Ernst and Young, South Africa’s economy was most attractive in terms of foreign direct investment in Africa.

Discussion
Ms S van der Merwe (ANC) asked what would be the reaction of other countries towards the termination of existing first generation BITs. She also asked about protection of South African investors elsewhere in the world.

Mr McIntosh asked about the unilateral ending of BITs and the effect on South African farmers investing across Africa.

Mr Hill-Lewis noted that the presentation was reassuring but encouraged the Department to improve its public relations.

The Chairperson asked about the development of the draft foreign Investment legislation.

The Minister welcomed comments and noted that communication was crucial and the Department would take that into cognisance. The Department was prepared to negotiate with African countries and the agreement with Zimbabwe did not cover retrospective land grabs.  The draft Foreign Investment Bill work was advanced and would provide security and protection to all investors. He noted that the foreign investment pipeline in South Africa remained in place and it remained a safe investment destination. The government would continue assisting investors. The investment protection regime was intended to create inclusive growth and employment in South Africa.

The Chairperson adjourned the meeting after stressing the importance of the discussion.

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