Industry Analysis

The Department of Trade, Industry and Competition (the dtic) gazetted its draft policy proposals to regulate and restrict scrap metal trade in South Africa for public comment in August 2022 which has yet to be tabled. The proposed scrap metal legislation forms part of Government’s plan to crack down on copper theft but does it run the risk of jeopardising the future of legitimate players in our industry?

THE BACKDROP

The draft scrap metal trade policy changes are a direct outcome of President Cyril Ramaphosa’s 2022 State of the Nation Address, where he promised to tackle growing criminality in the scrap metal value chain – particularly with copper theft and other metals stolen from public infrastructure. This is because criminals can easily conduct their black market businesses as it’s cheap to import furnaces to transform the metals, and there is no formal permit or registered trader regime to identify the legitimate sellers from the dodgy ones. The department proposes a host of policy measures to put a stop to this, including:

• Imposing a six-month ban on the exports of scrap metal from South Africa;
• Expanding the definition of waste and scrap metal to include other common types of metal that are exported;
• Temporarily suspending the price preference system (PPS) for scrap metal exports, with some exceptions;
• Developing a permit system for the export of these metal products;
• Developing a permit system for the import of furnaces and other scrap transformation machines;
• Creating a registration regime for scrap metal sellers with enhanced registration and strict reporting requirements;
• Restrictions on who can sell scrap metal and adding requirements that buyers only purchase from registered sellers;
• Beefing up border controls;
• Prohibiting the use of cash in scrap metal transactions;
• Black-listing offenders (Source: BusinessTech.co,za)

WORRYING IMPLICATIONS

Sassda Acting Executive Director Michel Basson says; “In principle, Sassda is supportive of the proposed legislation to stop the economic damage due to metal theft and infrastructure destruction. However, the fact that all metal waste and scrap are subjected to the proposed measures, is raising some questions within the stainless steel sector.”
He reports that as a member-driven association, Sassda received an immediate response to the proposed legislation from its member base. “While the majority of Sassda’s 187 member companies agree that the theft of copper and destruction of infrastructure remains one of industry’s major challenges to growth and sustainability, the association received some response that agreed with the broad approach that the minister has decided upon by including stainless steel in the measures.”

DIGGING DEEPER

The Genesis Analytics report to the dtic earlier this year, showed that the majority of the R45-Billion direct damage to infrastructure is mainly due to copper theft with other targeted infrastructure items including railway lines (carbon steel), streetlights (copper and galvanised carbon steel), traffic lights (copper and galvanised carbon steel), manhole covers (carbon steel), trellises and fencing (carbon steel) and steel railings (carbon steel possibly with stainless steel content). From this, it is clear that the theft of stainless steel has a very small impact on the issue at hand. It is therefore important to note the following:

• Local demand as an alternative to export markets - There is a very limited local market for stainless steel scrap and waste and the local mill will not require stainless steel scrap in foreseeable future. The recycling and scrap export organisations within the stainless steel industry will be severely impacted by the proposed export restrictions in terms of cash flow, profitability, and contractual obligations. These members report potential job losses.
• The value of stainless steel scrap and waste in business models - Stainless steel is an expensive input material. Fabricators do not see scrap as waste, but the value of stainless steel scrap is an integral part of the business model and crucial for competitiveness. An industry standard is that fabricators will create scrap of 20% or more from the input material. The lack of a market for stainless steel scrap or an artificial lowering of its value due to a ban on the only trade mechanism for scrap will seriously impact cash flow, competitiveness, and profitability. This will impact the industry sector’s ability to create or maintain jobs and hamper fabricated exports, while giving a cost advantage to imported stainless steel items.
• Restrictions on access to technology - Many of the pieces of equipment that would be banned from being imported through the proposed measures are regarded as critical for the distribution of stainless steel material and fabrication of stainless steel products. With the current increased workload in the stainless steel industry, access to this type of equipment for local fabricators and distributors would be crucial. Many fabricators, especially in the food and beverage industry, are currently negotiating the procurement of equipment from international suppliers including forming technology, e.g., press brakes and presses; various types of metal cutting technology, e.g., laser, plasma cutters, etc., and coil processing lines such as de-coilers and coil slitters. The lack of access to equipment and technology will negatively impact the industry’s ability to be globally competitive and the ability to localise currently imported products. This decision conflicts with certain initiatives in the Steel Master Plan.
• The lack of success with past measures - The measures imposed by government in the past include a similar ban in 2020 that was aimed at supplying local demand during COVID-19. This ban did not make a positive impact on the illegal trade in copper or damage to infrastructure. The legislative changes made in terms of sentencing and bail made in 2016, as well as policing improvements made in 2016, 2017 and 2022, did not contribute to the decrease in copper theft and infrastructure damage. It would therefore be highly unlikely that the ban on the export of stainless steel scrap and waste, including semi-finished products, will have an impact on copper theft and infrastructure damage.
• Global view - From a sustainability and environmental viewpoint, it should be mentioned that according to Worldstainless, 96% of end-of-life  Stainless steels are captured and recycled. This proportion is the highest global recycling rate of any recyclable material used anywhere in the world. Therefore, a domestic restriction on exports of scrap will undoubtedly become a recycling constraint for the global stainless steel industry.