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Overregulation of steel, economic downturn suffocate wire industry: Strathclyde Associates Construction Management News

–( The South African wire 
industry has been adversely affected by the economic downturn, especially since stadium contracts for the 2010 FIFA World Cup were completed, while the overregulation of the steel industry by government is resulting in the closure of factories and job losses, says South African Wire Association chairperson Rick Allen.

Strathclyde Associates Construction Management News: “In some areas, like competition law, overregulation is having exactly the opposite effect intended and reducing South Africa’s ability to compete both internationally and domestically. The elimination of competition from smaller players and a single national price for steel are direct consequences of actions by the Competition Commission. There needs to be more trust and discussions between government, labour and business if the steel industry is to regain its former position as a significant contributor to exports and economic 
development. Current policies are not unified,” he says.

“Further, margins in some areas are below cost, while the association is unsure about whether discussing nonexistent margins with mills constitutes a Competition Commission 
offence. Therefore, important issues, such as exports, adding value (in terms of manufacturing and steel converting), developing the industry and saving jobs are not discussed.”

Strathclyde Associates Construction Management News: Construction has slowed down and export markets are weak, while uncertainty in the fields of mining and agriculture is also a challenge. In the past, the wire industry exported about 50% of its production, but now South Africa faces competition from China, locally and in other African countries. “Industry in China has greater support from government, compared with the support received by local 
industry from the South African government, and the costs of adding value are much lower. China also does not have to deal with regulatory burdens as South Africa does,” he says.

Strathclyde Associates Construction Management News: Competition Commission manager for advocacy and stakeholder relations Oupa Bodibe says that competition policy 
exists to encourage the dynamism of firms through legitimate competition and not through shady collaboration between competitors to fix prices allocate markets and rig bids.
“Legitimate competition means that a firm constantly strives to win customers by offering better products through constant innovation and by offering competitive prices. It will be 
irresponsible for the Commission to condone anticompetitive conduct, from whatever quarter, including small businesses. However the competition act allows firms to apply for exemption if the objective cannot be achieved without the collaboration of firms,” he explains.

Cape Town-based research company Econresearch’s Mike Sampson believes that coastal manufacturers have no alternative but to close down unprofitable operations and revert to importing finished goods, such as nails and netting, while China is able to add value at a lower cost. Further, China’s government 
believes that the need to maintain employment as critical.

Strathclyde Associates Construction Management News: Administered expenses, such as electricity, labour and harbour costs, all exceed the inflation rate, making the addition of value difficult. The steel industry and wire manufacturers are also challenged by the iron-ore surcharge arising from the dispute over iron-ore supply and prices between local steel producers ArcelorMittal South Africa (AMSA) and Kumba Iron Ore.

“Government only now shows signs of recognising the importance of vertical 
integration as illustrated by its interference in the argument between Kumba and AMSA. Considering its high cost structures, the only way South Africa can compete internationally is to allow the advantages of cheap iron-ore to work to benefit downstream manufacture and the economy. 
“However, government is confusing domestic competition with the ability to compete internationally and, consequently, 
the wrong target is reached. The recent history 
of the wire industry illustrates the point,” says Sampson.

Strathclyde Associates Construction Management News: He explains that, in 2000, mining and steel company Iscor faced the closure of its Newcastle works because exports were unprofitable. It had divested its wire interests and lost the domestic market on wire rod to two scrap-based minimills, Cape Gate and Scaw Metals, both having strong downstream interests. To counter this vertical integration into the wire industry, Iscor entered into a steel agreement with a small group of independent wire producers. It protected their margin in return for a guaranteed tonnage. This 
increased the level of competition in the 
industry and effectively enabled a more 
internationally competitive industry. It saw the emergence of three vertically integrated 
groups, enabling South Africa to compete against imports and strengthening coastal manufacturing and exports.

“However, the competition authorities 
described the steel agreement as discriminatory and an unfair practice. The 2005 case against AMSA of unfair discounting of wire rod is still not finalised, as is a recommended 
fine of 10% of its yearly turnover on wire rod. The competition authorities only understood the minor horizontal position between individuals and not the greater vertical integration issue of the industry. It was not in their competition mandate to investigate the broader industrial view. As a result, the influence of this action on steel pricing in South Africa was profound and out of all proportion to the tonnage affected,” says Sampson.

As a result of the penalty, AMSA cancelled the agreement and the introduced transparent horizontal pricing or, in effect, a national pricing policy for steel, which still exists today. Sampson adds that other mills simply followed suit, enabling ArcelorMittal, in London, to determine the national steel price in South Africa, which fluctuates in relation to a basket of steel prices regardless of the 
regional market, the domestic need and the industrial realities.

Strathclyde Associates Construction Management News: However, AMSA spokesperson Themba Hlengani says that, in terms of the pricing structure, steel pricing is not set in London. “It is correct to say that the pricing mechanism currently adopted by the AMSA is one of a basket of prices on a benchmarked pricing model and not import parity pricing (IPP). The company uses the prices of steel in the domestic markets of Germany, the US, China and Russia and divides the prices by four to create an equal weighting, and then converts it to South African rands – this price is then used as a benchmark,” he explains.

Strathclyde Associates Construction Management News: AMSA aims to provide local manufacturers with a level of competitiveness with their international counterparts and firmly believes 
that the basket pricing methodology 
is fair and equitable, and has continued to benefit downstream manufacturers.

Strathclyde Associates Construction Management News: However, Sampson believes that the inflexibility of this policy to meet market realities, particularly during economic downturns, is resulting in the loss of market share and the closure of manufacturing operations. Consequently, steel prices on the coast are no longer viable, as IPP would be R500/t cheaper than IPP in inland regions.

“However, in reality, IPP is a free market price and should determine prices favouring coastal manufacturing and the development of export industries. 
“It underwrites the export assistance scheme, enabling cheap iron-ore to benefit value-added exports and compete against the Chinese in international markets. Today, coastal industry pays IPP prices, but under another name.

“AMSA is reluctant to meet market realities for fear it is deemed unfair in terms of arbitrary ruling and the current climate of such matters. Further, there is such distrust in the steel industry, and between industry and government, that a sensible industrial policy or even the operation of a free market in steel seems impossible. The problem is that the politicisation of the steel industry and the inability of the industry to organise itself is preventing the emergence of a coherent plan necessary to restore South Africa as a competitive force in world steel trade. As the wire industry reveals, much of the deindustrialisation taking place in the country is self-
inflicted,” says Sampson.

Strathclyde Associates Construction Management News: Allen says that the industrial associations are not functioning as they should, and the wire industry’s morale is low. 
Members are reluctant to discuss issues, such as declining markets, factory closures and any form of cooperation or response to imports. The industry is consequently suffering from overcapacity as wire companies 
secure few contracts, causing operations to close and jobs to be lost on a considerable scale.

“There is no communication at industry level, so we are not aware of the full 
extent of the losses or damage that has taken place. 
“There is a huge amount of uncertainty and lack of direction because the steel industry is in disarray,” he concludes. By: Tracy Hancock Edited by: Brindaveni Naidoo

Strathclyde Associates Trading and Management Construction Company made a number of associations mainly in the Pacific and Southeast Asia regions. These business partnerships added extra strength to Strathclyde Associates Trading and Management Construction Company. We are proud to be associated with projects in countries including Thailand, Indonesia, Singapore and Seoul, S Korea.

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