After several decades of protection and billions of rand in public money, SA’s only primary steel producer, ArcelorMittal SA (Amsa), has announced its intention to close its long steel business and retrench up to 4,000 employees.
This is not for lack of effort from the department of trade, industry & competition to keep this business alive, though Amsa’s failure is symptomatic of a broader problem with SA’s steel policy: billions spent and significant policy attention, but never in the right places.
Steel is a strategic input for the economy. It is fundamental to construction, automotive production, energy, mining, capital equipment and infrastructure. If steel is too expensive, every part of the economy pays more. The effect cascades downwards, raising the cost of building homes, producing vehicles, installing energy infrastructure and manufacturing equipment. By making inputs more expensive, tariffs will hurt the very industries that create the most jobs, and will not fix the root cause of our steel sector’s terminal decline.
The International Trade Administration Commission (Itac) recently invited submissions on its intention to hike steel import tariffs, and its proposal to introduce an import surveillance system for steel products. The DA has made its submission to Itac, setting out clearly why blanket tariff hikes will not fix the problem and why reforms are urgently needed instead.
The temptation to raise tariffs is not unique to SA. Around the world, governments often look to import barriers as a quick fix to help struggling industries. However, the evidence is clear: tariff increases tend to make matters worse. Research by the US-based National Bureau of Economic Research, covering 151 countries over a 60-year period, found that tariff increases generally lead to a significant fall in domestic output and productivity. In SA, the Reserve Bank has shown that the bill for tariffs on consumer goods ends up being paid by consumers. Far from helping industries to grow, tariffs raise costs for businesses and fuel inflation for ordinary South Africans.
Extensive value chain
Despite successive rounds of tariff hikes, SA’s steel production has stagnated. Some domestic suppliers of iron ore have even closed because of weak demand, while manufacturers that use steel as an input have to contend with higher steel costs and unreliable supply chains.
Roughly two-thirds of economic activity in the steel value chain is located not in the making of steel but in using it to make other things: machinery, vehicles and manufactured goods. It is precisely these firms “downstream” of steelmakers that are most harmed when tariffs drive up steel prices.
Protectionism has consistently failed to revitalise the sector. There is no reason to believe it will succeed now. That approach should be rejected, and one that addresses the structural problems undermining competitiveness must be found. Structural reforms, not tariffs, are the only path to long-term competitiveness. The steel industry, like much of SA’s economy, is being held back by high input costs, unreliable energy supply, failing logistics and heavy regulatory burdens. These challenges cannot be solved with tariffs — they can only be solved with reforms.
Steelmaking is energy-intensive and the cost and reliability of electricity is critical. SA needs a competitive electricity market that can supply affordable power to industry. Without fixing that, no amount of tariff protection will keep the sector viable. Glencore, for instance, intends to close two of its local smelters because it is now cheaper to send ore overseas to be smelted there than it is to do so locally.
Rail bottlenecks and port delays raise delivered input costs and erode export competitiveness. SA should allow greater private participation in logistics to expand capacity and improve efficiency. Fixing Transnet is as important to the steel industry as fixing Eskom.
Regulatory minefield
SA’s product market regulations are among the most restrictive among Organisation for Economic Co-operation & Development and G20 nations. Licensing processes are slow, costly and unpredictable. By shifting to risk-based licensing and adopting modern principles such as “silence is consent” and “once-only” rules, the government can quickly reduce the administrative burden on firms.
Too often big state contracts are structured in ways that shut out small and medium-sized businesses. By dividing contracts into lots, scaling time frames to project complexity and enforcing prompt payment, the government can open opportunities for small fabricators and unlock growth across the sector.
We must support maintaining duty-free treatment of raw materials and critical inputs used in steelmaking. Raising input costs for steel producers will only deter investment and further weaken industry competitiveness. Duty-free access to essential inputs lowers costs and encourages productive investment, which is exactly what the industry needs.
The truth is simple: higher tariffs and tighter controls will not revive SA’s steel industry. Only reforms that lower costs, improve efficiency and create a competitive environment will achieve that.
The steel sector can be rebuilt, but only if we focus on the fundamentals: affordable energy, efficient logistics, responsive regulation and open, rules-based trade. We need an economy that competes, grows and creates jobs, not one that hides behind tariff walls while falling further behind.
• Mdluli is the DA’s deputy spokesperson on trade, industry & competition.
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