Unintended consequences are the result of scrap-metal regulation

by Zuerita
Unintended consequences are the result of scrap-metal regulation

Macsteel, one of Africa’s leading manufacturers, merchandisers and distributors of steel and value-added steel products, believes the intentions and rationale behind the proposed introduction of an export tax on scrap metal may be contradictory to the greater wellbeing of the scrap-metal sector.

According to Mike Benfield, Macsteel’s chief executive officer, market forces should be left to themselves to create equilibriums in supply and demand.

“There are too many unintended consequences created as a result of regulation, making support for any regulation impossible,” he says. “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.

“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,” Benfield says. “This will force scrap producers to sell locally at better pricing than they would be able to achieve on the international market.”

Four implications based on the above

  1. Scrap producers will be less profitable in an already depressed sector within a troubled economy.
  2. Their primary products will be more expensive (owing to the scrap by-product being less valuable), yet South Africa depends on these manufactured products to be competitive internationally and being less competitive will have negative consequences.
  3. The imposition of a tax on scrap is a contradictory policy: More steel will be produced from scrap, which will have negative consequences on the producers of primary steel from iron ore.
  4. High-quality steel will become more expensive, as it may need to be imported if primary steel producers find themselves in more difficulty, resulting in goods produced in South Africa from high-quality steel becoming more expensive.

Benfield says we also need to ask if cheaper scrap is going to result in cheaper steel in the local market, benefitting the downstream customer or end-product producer.

End-users of steel (whether sourced from scrap re-melters or primary producers), who don’t produce scrap in their own processes, need to be competitive and a lower scrap price may lead to this segment of the sector being more competitive.

Lastly, middle-men or merchants who facilitate the efficient supply chain of the sector will be impacted by lower pricing (margins are earned off higher cost bases), but the focus here should rather be on the steel end-user.

“On this basis Macsteel believes 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,” Benfield concludes.

Tel: 011 871 4600
Email: info@macsteel.co.za
Website: www.macsteel.co.za

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