30 Oct 2015
South Africa Safeguards Domestic Industry with Chinese Steel Tax
South Africa has imposed a 10% tariff on certain imported Chinese steel products. While the move has been designed to protect the country's ailing steel industry, many fear international repercussions and an adverse effect on exports.
South Africa is to apply a 10% tariff to certain steel products imported from China. The move was approved by the South African Department of Trade and Industry, following a recommendation by the International Trade Administration Commission of South Africa. The imported products subject to the new tariff include zinc-coated/galvanised steel, aluminium-zinc coated steel and colour-coated steel.
Cheap imported steel, mainly from China, has flooded the South African market of late, threatening the viability of the country's domestic steelmaking industry. The sector has experienced significant losses over the last five years, with some manufacturers looking to close plants or cut jobs as a result. Imported Chinese steel currently sells for some 25% less than the price of its domestically produced counterpart.
The South African government approved the tariff after its own investigation into the issues besetting the sector. The initial investigation was triggered by calls to impose the customs duty by several domestic bodies, including ArcelorMittal South Africa, the largest domestic steel producer, and a number of the steelmaking labour unions.
The threat facing South Africa's steel industry is partly due to the global glut of steel, with the country having seen a 70% increase in the import levels of the material over the last 12 months. South Africa, though, is not alone in experiencing these challenges, with the global overcapacity in the steel market now said to be in the region of 300 million tons a year, resulting in the lowest prices for a decade.
Prior to this latest move, South Africa was the only steel exporter in the world not to impose import tariffs. In part, this more protectionist stance was triggered when Evraz Highveld Steel and Vanadium, one of the country's leading iron and steel producers, was forced into administration as a consequence of falling prices.
Commenting on the challenges facing the sector, Paul O'Flaherty, Chief Executive of ArcelorMittal South Africa, said: "This threat is largely being driven by China, which produces 50% of the world's steel and has the capacity to produce still more. The Chinese government supports its steel industry through rebates and subsidies, with the result that steel can be sold at less than production costs."
Defending the new import duty, O'Flaherty said: "The steel industry plays a critical role in South Africa's broader economic development goals. Its existence and sustainability are crucial in socio-economic terms. Imported steel also poses a security risk to the supply chain. Additionally, South Africa's distance from other steelmaking nations increases the risk of security of supply and poses challenges for importing."
Despite this, many have asked whether there is actually a need for domestically produced steel, given that it can be imported more cheaply from China as well as from other countries. There is also the argument that market protection, in the form of tariff restrictions, is counterproductive, ultimately contributing to the overcapacity that is already bedevilling the industry.
The justification for maintaining South Africa's steelmaking industry focusses on three key areas. Firstly, there is the predicted growth in demand for steel over the long-term, then there is the fact that steelmaking currently accounts for some 1.1% of South Africa's GDP. Finally, the industry, as it stands, currently employs some 200,000 people.
Highlighting this, O'Flaherty said: "Steelmaking exerts an influence on the wider economy and on South Africa's iron-ore mining industry. Steel is a key enabler in South Africa's mining, construction and automotive industries – all of which have been identified by the government as important drivers in the country's already struggling manufacturing sector."
Impact of Tariff on SA-China Relations
The new tariff, however, has not been universally greeted as a positive move, with the expectation that many of South Africa's trading partners may make a reciprocal move. Jeff Radebe, South Africa's Minister in the Presidency and an influential ANC political veteran, believes that the new tariff may also have a detrimental knock-on effect on broader trade relations between South Africa and China. The Asian giant has been South Africa's largest export market since 2009, with Radebe expressing concerns that South Africa's exports to China are now likely to be compromised.
For South Africa, the move may also weaken its influence within BRICS, the association of five of the world's major emerging economies (Brazil, Russia, India, China and South Africa). Ironically, the introduction of the tariff also comes at a time when South Africa has signed a memorandum of understanding (MoU) with China's Hebei Iron and Steel Group for the construction of a new steel plant in South Africa. With work planned to begin in 2017, concerns have now been raised as to whether the local market can sustain another plant.
The South African steel industry concedes that, as well as protecting the industry through import duties, it also needs to address its own internal structural problems. The industry has already acknowledged that it needs to review its pricing structure if it is to prove competitive in the future. There have also been calls for it to address the fraught issue of its labour relations. In 2014, a series of strikes destabilised the country's metal industry, resulting in further setbacks for its already vulnerable manufacturing sector.
Mark Ronan, Special Correspondent, Cape Town