Industry Insight

Irshaad Kathrada, a South African student at Oxford University and the cousin of political stalwart Ahmed Kathrada, recently achieved distinction in his MSc in Sustainability, Enterprise, and the Environment. His noteworthy study, titled Estimating the Impact of the European Union (EU) Carbon Border Adjustment Mechanism on South African Steel and Aluminium Industries (click here to see full paper), delves into the potential ramifications of the EU's carbon border adjustment mechanism (CBAM) on South African exports in the steel and aluminium sectors.

In a comprehensive approach, Kathrada collaborated with local entities, including Sassda, and generously shared the complete paper with the industry. Employing a mixed-method methodology, he utilised the gravity model of trade for econometric estimates, complemented by interviews with 21 stakeholders, spanning policymakers, producers, financiers, and academics.

The study forecasts a significant impact on South African exporters, estimating a potential decline in direct revenue ranging from 6% to 9%. Had the CBAM been in effect in 2022, this would have equated to a staggering loss of between $114-Million to $185-Million in sales for the year. Stakeholder interviews underscored additional threats, including heightened competition in domestic and alternative markets, alongside input supply shortages as global steel and aluminium markets adjust to reduced EU access.

While acknowledging the commendable ambition of the EU's climate policy, the study highlights potentially severe adverse effects for several countries, even those with limited direct exports to the EU. Balancing these impacts with the imperative to achieve net-zero emissions by mid-century becomes a critical aspect of the research.

Local assessment of the EU CBAM regulations on the South African stainless steel industry necessitates consideration of several factors. The industry's vulnerability hinges on the carbon emissions associated with its production processes, potentially leading to increased costs for exporting to the EU. Consequently, local companies may need to implement adjustment strategies, adopting cleaner technologies and investing in renewable energy, energy efficiency measures, or other carbon reduction initiatives.

However, such adjustments come with financial implications, as compliance with CBAM regulations could elevate costs, potentially impacting the industry's competitiveness in EU markets. A thorough evaluation of the economic feasibility of implementing carbon reduction measures and their impact on product pricing becomes imperative.

Positive relationships between the EU and South Africa could mitigate immediate impacts through trade relations and negotiations. The South African government has the opportunity to engage with the EU in discussions on acceptable emission benchmarks, transitional periods, or other measures to facilitate a smoother adaptation to the new regulations.

Given South Africa's position in the global market, EU regulations are poised to influence global market dynamics for stainless steel. The South African industry retains the option to explore alternative markets or collaborate with the EU on initiatives promoting sustainable production.

Despite the challenges posed by the CBAM regulations, South Africans are resilient and view them as a potential catalyst for technological innovation in the local stainless steel industry. This perspective suggests an opportunity for the development and adoption of cleaner and more sustainable production methods, reflecting the potential for innovation in a challenging area of production.