Impact of increasing tariff of primary steel products

Willemien Viljoen, tralac Researcher, discusses an application before South Africa’s ITAC for an across-the-board import tariff increase on primary steel products

THE INTERNATIONAL Trade Administration Commission of South Africa (ITAC) has received an application by domestic steel manufacturers for an across-the-board import tariff increase on primary steel products which include flat and long carbon and stainless steel products. The application is led by Africa’s largest steel producer, ArcelorMittal South Africa and seems to be part of a two part strategy by the manufacturer to address competitiveness issues. The application to increase the tariff requests an increase in the tariff on primary steel products, which are currently mostly imported duty free, to an import duty of 10 percent. The reasons for the application are stated as a concern from the industry due to excessive global steel capacity, difficult trading conditions and rising input costs. The most prolific trading concern that has been raised is intense import competition, mainly from China.

According to the trade data South Africa’s imports of primary steel products increased by 10 percent over the last decade, while exports decreased by 3.4 percent over the same time period. Over the last ten years China’s exports of primary steel products to South Africa have increased by 43.8 percent. In 2014 South Africa mostly imported primary steel products from China (32.7%), Germany (7.7%), Japan (7.1%) and Sweden (5.7%).

The second step taken by Mittal is a request to the Department of Trade and Industry (dti) to re-evaluate their 2012 decision to exclude steel from preferential procurement plans for public infrastructure programmes. In accordance with Article 217(2) of the South African Constitution and the Preferential Procurement Policy Framework Act of 2000 the Preferential Procurement Regulations came into effect at the end of 2011. These regulations allow for a sector to be designated for local production and be a preferred supplier when tenders are awarded. In April 2012 the dti decided not to give preference to domestically produced steel due to a lack of a ‘developmental’ steel price and an effective domestic monopoly in the production of most steel products. The lack of a ‘developmental’ price has been an ongoing dispute between the dti and Mittal. Although there is no official definition of ‘developmental’ pricing it seems to indicate a pricing strategy that allows domestic steel producers to benefit from low-cost iron ore that then flows through to downstream industries. At the heart of the dispute is Mittal’s pricing strategy which has resulted in steel prices in South Africa being some of the highest in the world with the resultant increase in imports from low-cost producers like China for construction projects and infrastructure development programmes.

This has presented ITAC with a unique balancing act to determine whether to approve the tariff increase. On the one side of the scale is domestic steel manufacturers which is a key sector in terms of the Industrial Development Action Plan (IPAP) that contributes significantly to South Africa’s gross domestic product (14.4% in 2011) and employment (29.74% in 2011). The industry has indicated that if no protection against international competitors is provided operations might need to close which will result in job losses. On the other side there is infrastructure development, industrial development and consumer welfare. The increase in the price of imports will increase the cost of private and public infrastructure and industrial development plans. This will increase the cost of not only private construction companies and consumers, but also for the public as a whole due to the higher cost of public infrastructure development. This in turn can have an impact on economic growth, job creation and poverty alleviation.