The largest users of ferrous scrap in South Africa are the steel mills, more specifically long steel producers such as Scaw, Cape Gate, Unica, Fortune Steel and Veer Steel, with Pro-Roof (SA Steel Mills) due to come online shortly. After the mills, the next largest users are foundries.
The pricing of scrap in South Africa is already controlled which has created a differential between scrap-based producers (electric arc steel makers) and the integrated producer, namely Arcelor Mittal South Africa. ITAC (the International Trade Administration Commission of South Africa) currently controls the scrap price by setting the price at which scrap can be exported, based on the Rotterdam price at the time and taking our local exchange rate into account. This price is published on a monthly basis. Scrap merchants wanting to export are required to declare their achieved price to the market and give first right of refusal to the local market.
Turkey is the largest scrap consumer in the world with several producers of merchant bar, very similar to the South African scrap mills scenario, and as a result, Turkey is regarded as a low-cost producing country. In comparison, South African merchant bar pricing is still US$140 to $150 cheaper per ton compared to that imported from Turkey. This translates to 23% below imported pricing and 13% below if the existing duties on imported steel were disregarded.
This gap in pricing has been made possible due to the existing control over scrap pricing. We believe that the scrap price will drop further should an additional duty or tax be imposed on the export of scrap, as the export price (including any additional duty/tax) will need to be matched to the international price. This will force scrap producers to sell locally at better pricing than they would be able to achieve on the international market.
As such, this has several implications:
With this in mind, we believe that all regulation or support should be directed towards the end-user and downstream economy to ensure that goods and services produced for export out of South Africa are as competitive as possible, from both quality and price perspectives.
Furthermore, we firmly believe that markets should not be regulated in favour of any one constituent party or sector over another. Market forces should be left to themselves to create equilibriums in supply and demand. There are just too many unintended consequences created as a result of regulation, making support for any regulation impossible. It’s clear that efficient and cost-effective producers and supply chain participants need to emerge through a natural selection process rather than one which is forced or regulated.