Well-intentioned policies can sometimes have unintended consequences, particularly when addressing complex issues. While not uncommon, once identified, unintended consequences demand attention and correction. To know and not to act is unconscionable.
Neither "sexy" nor particularly well understood, scrap metal policy is one such example of a policy with unintended consequences that are wide-ranging and far-reaching.
A significant element of scrap policy was crafted not as an element of industrial policy, but rather as a response to the criminal theft of, trade in and export of scrap metal, principally copper.
While such criminality had direct commercial and industrial impacts, the consequential scrap export ban was a blunt policy instrument that has failed to achieve its stated objective.
Moreover, while the most lucrative and damaging industrial impact was from copper theft, the inclusion of ferrous metal in the scrap ban was inappropriate and difficult to justify from a crime prevention or illicit trade perspective. It has since been removed.
A more targeted industrial policy intervention was the introduction of a price preference system (PPS) under which local manufacturers were given a discount when purchasing scrap metal. Aimed at supporting domestic industries by ensuring local producers had access to affordable raw materials, the rationale for the PPS was to boost economic growth and protect jobs.
The intended major beneficiaries of the policy were local electric arc furnace foundries and mini-mills. Moreover, these local players were further supported by the department of trade, industry & competition, together with generous funding through the Industrial Development Corporation.
The failure of PPS to achieve the anticipated commercial and industrial objectives led to a government decision in 2021 to replace it with an export tax on scrap metal.
The problem is that, rather than replacing PPS, it was retained and the scrap export tax was simply overlaid on a failing policy. Noteworthy too is that scrap metal can only be exported after it has been offered domestically at the discounted PPS price, and for which there are no local buyers.
There is no shortage of affordable quality scrap metal in the country and scrap collection has kept up with local demand, with the existing accumulated pool of scrap increasing at around
1-2Mt per year.
Despite its laudable intentions, PPS has faced numerous challenges relating to enforcement and transparency compounded by some players simply gaming the system and undermining the achievement of its objectives.
Further, the unintended consequences of PPS and the export tax were significant and have distorted the steel market by creating an artificial price advantage for some.
As a result, the steel industry and value chain has been significantly affected as follows:
The South African ferrous scrap industry has been decimated by the transfer of value from collectors, who in many instances are smaller black-owned businesses and generators to a few smelters/mini-mills;
"Valuable" scrap is being used to make lower-quality products to the detriment of primary steel producers that use a mix of iron ore and scrap to make value-added products that the mini-mills are not capable of producing;
It has been a disincentive for effective scrap collection;
The potential depletion of scrap that can be used effectively to benefit the country’s decarbonisation and climate-change objectives insofar as the steel industry is concerned;
It has created a false economy for mini-mills that are otherwise not able to operate competitively, and this inefficiency in the economy needs to be addressed so that it does not lead to the demise of the rest of the primary steel industry; and
One of the main reasons that led to the recent decision regarding the potential closure of ArcelorMittal South Africa’s long-steel business was the artificial price advantage provided to mini-mills through the PPS and export tax on ferrous scrap.
There is an opportunity for the government and the steel industry to work together to achieve the value that the steel industry can deliver to support national priorities such as job creation, economic growth and meeting climate-change targets.
To do so, however, we need the support of the government to act with the necessary urgency to take steps to place the steel industry on a path towards sustainability.
It is an opportune time to examine local scrap metal policy afresh as part of a broader revisiting of the steel master plan, but let’s first start with the urgent low-hanging fruit and scrap the tax on scrap. It should be removed as soon as possible to avoid any further prejudicial impact.
• Verster is CEO of ArcelorMittal South Africa
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