The 3 month export ban on scrap metal is finally over and has temporarily been replaced by a modified PPS. The PPS is a government enforced discount on the sale of scrap metal to the downstream consumers of such scrap. It has been in place since 2013 and has resulted in some quite interesting outcomes, some of which are noted below:
Less scrap metal is being exported
The volume and value of scrap metal exports has fallen significantly sine PPS was implemented. If we for a moment focus on ferrous scrap (steel in its many varieties), our exports have dropped from 1.4m tons per annum in 2010/11 to 542 000 tons in 2019/20. The value of the exports has equally fallen from a high of R5.5bn in 2011/12 to R1.9bn in 2019/20. This loss of value is in part attributed to their being less stuff being manufactured and so the factories generate less scrap, to the PPS forcing companies to sell locally at a discounted price. In this case, we have the state forcing one part of the value chain to subsidise another.
There are now more foundries, mini-mills and mills
On the face of it, this is a good thing and would point to the success of the PPS, but this would be a crude reading of what happened in the market. This significant investment into downstream consumers (much of it IDC funded) flies in the face of there being a shortage of scrap metal in the market and this absolutely is the narrative being put forward.
Veer Steel Mills, states “Yes, there was a shortage of quality and affordable scrap metal for the metal processing industry (manufacturing of finished products) pre the lockdowns and government interventions to assist the industry”
The export ban on scrap metal
If there was indeed such a shortage of scrap metal, why have the number of foundries and mini-mills doubled in the last 10 years? Why would anyone be investing in a sector where obtaining the raw material is in such short supply? Part of the reason might be that the PPS makes that raw material cheaper and forces more of it to remain in the local market. This however creates a different set of problems, which came into stark relief when Minister Patel banned the export of scrap metal on 3 July. Rather than forcing a discount into the market, he simply removed the whole export market for 3 months, forcing down the price of scrap locally.
This was seen as a good thing by the downstream consuming industry with trade union Solidarity stating “Recently when the minister of DTIC banned the scrap export for couple of months the industry started receiving good quality scrap in high volumes at competitive rates which allowed the industry to secure export orders from Kenya and Tanzania.”
Scaw Metals Group, another enthusiastic supporter of an all out export ban, says “We request that instead of a duty being applied all exports of ferrous scrap should be prohibited completely.”
The scrap metal value chain
Although clearly the ban on exports predictably benefitted companies like Scaw, this does not address the economics of the scrap value chain. Scrap metal enters the market from 4 main sources:
- Scrap collectors in the informal sector, collecting end-of-life metal, such as discarded beverage cans, and selling their goods to a recycler. According to the DTIC, there are 300 000 waste collectors in SA.
- Manufacturers working with metal, who have offcuts and shavings left over as part of their production process.
- The construction sector, both as part of the construction process and also the recovery of metals after buildings have been demolished.
- State owned enterprises. Transnet is, in fact, the largest generator of scrap metal in SA.
The 4 sources of scrap metal send their goods to recyclers who then sort the scrap and process it (for example by shredding it) and then selling that product to the relevant consumer. The recyclers are a critical part of this value chain and removing them removes the market that turns a waste product into a raw material with economic value. Would Scaw be able to receive a written-off car, an old broken bicycle and bags of iron filings at their premises for use as a raw material? Could they deal with hundreds of scrap collectors at their gate, working through the bags to identify the scrap metal on they can use before sending the collector on his way to an aluminium smelter who can use his used beverage cans?
The new PPS
Government recognises that the scrap recyclers are an important part of the value chain, but the revised PPS places an undue burden on the upstream sector. If the scrap consumers want their raw material as cheap as possible (which they obviously do), they need to be careful that in this process they don’t destroy the metal alchemists who turn waste into valuable raw materials.
Key highlights of the new PPS are:
- Scrap recyclers at the coast have to offer an additional 10% discount if the buyers of the scrap are inland (which most are). In the case of steel, this is on top of the already large 30% PPS discount.
- If the potential buyer of the scrap metal decides to not purchase the scrap, after inspecting it, the recycler has to cover their travel costs.
- Recyclers have to give 30 days credit to any buyer who can produce a bank guarantee. The cost of a bank guarantee is around 1% per annum and the cost of short-term borrowing is around 10% per annum (in some cases higher for smaller companies). It should be borne in mind that scrap recyclers typically are paying cash for their scrap (how many informal scrap collectors are giving 30 day credit terms?) and can only sell the scrap when they have enough to make a commercially viable sale. Their working capital cost is therefore extremely high and they are now being forced to give credit, when already stretched.
Investing at a time of shortage
If we go back to Solidarity for a moment, they say “South Africa in the past few years has grown in secondary steel making that particularly only depends on ferrous scrap. Moreover a few more players are entering the market and the existing plants are in the process of increasing their capacities. There will be a big shortage in the coming years of scrap and Solidarity believe it will be too late then to prohibit the scrap export completely” (sic)
Under normal market conditions, if the demand for a product goes up and its supply remains stable, then the price will increase. This would incentivise more people to enter the market and the supply and demand would move towards equilibrium again. The very opposite will happen here though. If the downstream sector keeps expanding on the back of the forced depression of the upstream prices, the extra supply will simply not materialise. At some point the scrap collector will not be paid enough to warrant collecting the end of life metal and factories will find it cheaper to send the scrap to a landfill than to sell it to a recycler. Where increased demand should see the whole value chain thrive, this will not happen in this case, because the growing demand only happens at the cost of the everyone upstream.
Some metal recyclers will fail and new entrants will be scarce, because why would you want to invest in a sector whose profits are forced downwards so another sector can thrive? What happens to the foundries and mini-mills if the money tap is turned off? Are they then forced to do their own recycling and perhaps buy up distressed recyclers?
An export tax on scrap metal
Although I believe the market should be allowed to find its own equilibrium, the uncertainty created by PPS and the export ban are worse alternatives than the export tax. At least with the tax, its quantum is stable for at least a year at a time, and can be factored into investment decisions. An export tax will be implemented next year and although the final details of this tax are not yet clear, it is almost certain to be implemented. This would then remove PPS and although the export ban could still theoretically be implemented, this is considerably less likely.
The scrap recycling industry is a crucial part of the whole metal value chain and it is heartening to see scrap metal being considered in the draft version of the steel industry master plan. This is an important economic sector, supporting an enormous number of people. Considerable care should be taken, before tinkering too much and potentially putting us in a position like Zimbabwe, where scrap metal litters the countryside because they have no mechanism to convert this from waste into a valuable commodity.
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