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Localisation is not a free lunch, but it does level the...

Defend Truth

Opinionista

Localisation is not a free lunch, but it does level the steel industry playing field

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Charles Dednam is the secretary-general of the South African Iron and Steel Institute.

Localisation on its own can never drive industrialisation, and neither can import substitution, but a situation for fair trade should be created, clear of corruption and illicit import transactions.

Localisation, an argument goes, is economically myopic. It ignores the high but diffuse costs that society must pay even as it creates small but highly concentrated benefits for businesses whose output will expand.

In many cases, this argument is sound. However, localisation was never meant to be undertaken at any cost. The market remains the price-setter, and the product can only demand space in the market at a cost-competitive price. Localisation is more about finding the ideal equilibrium between supply and demand, dealing with the many wrongs responsible for the massive deindustrialisation of the South African manufacturing base. 

Localisation on its own can never drive industrialisation, and neither can import substitution, but a situation for fair trade should be created, clear of corruption and illicit import transactions. 

The steel industry fruitlessly fought for a prolonged period to stop the imports of galvanised corrugated sheeting entering the country at around R3,000/ton, while ferrous scrap is selling for close to R5,000/ton. Local selling prices to the public for this same product are between R28,000/ton and R54,000/ton and, in some instances, paper-thin thicknesses with far below standard zinc coatings make the product far inferior in quality. How can you maintain a manufacturing base against these odds?

The principal problem with any version of a localisation policy is the assumption that it is something of a free lunch: demand is transferred from imported to locally produced products to benefit local firms, their employees (actual and prospective) and owners. Of course, to the extent that positive externalities are associated with local production, this will also accrue straightforwardly to the national economy. But the supposed costlessness of the switch from imports to local products demands some interrogation.

Citing Professor David Caplin: “When products are designated for local procurement, those products were not the buyer’s first choice because, if they had been the first choice, there would be no need for the policy. But if the local products are not the first choice, there must be a reason for that. Are they more expensive? Are they inferior in some way? There must be a cost to choosing the local product over the imported product; otherwise, there would be no point to the localisation policy.”

The scenario sketched by the professor is valid, and we do have the “free lunchers” among us. Therefore, localisation can only succeed when there is justification on a sustainable basis to promote local manufacturing. 

Local steel manufacturing is part of the backbone of an industrial economy. It has a large economic multiplier effect (five to six times) along with the ability to enable and grow local, skilled capacity. The steel sector offers jobs that are highly skilled and well remunerated — above the average of most other mining, construction and manufacturing sectors.

The argument that the manufacturing capacity in South Africa is unduly protected, making the product offerings uncompetitive, is a blanket statement which, in many cases, is not valid. The South African Iron and Steel Institute (Saisi) compared the local prices of structural steel offered by the mills to that of equivalent imported Chinese steel, not factoring in the duties and taxes, to see if the cost of local steel is problematic or is inflating the cost of fabrication. What we found is that the local offering is much in line with that offered by the most competitive region in the world. 

South Africa is also not an outlier in terms of having customs duties. Most steel producing countries have taken significant steps to protect their steel sectors against imports as per internationally agreed WTO rules. Normal customs duties on steel imports are to be seen in 150+ out of 200 countries worldwide and in almost all major steel producing countries. A total of 135 countries have an average of 10% duty on South African exports to them, including China, which has a duty of 5% on South African steel imports.

We agree that the structure of a localisation policy should not empower local suppliers to raise prices in a way that is unaligned with equivalent offerings from elsewhere in the world. Instead, efficiencies in local manufacturing should be enhanced to avoid nurturing inadequacies in the manufacturing process.

The drive towards localisation could also have strategic intent, and even when this is the case, development in manufacturing should be accompanied by an adjustment plan towards competitiveness. However, reducing efficiency incentives should not result in divorcing the domestic firm from competitive pressures. On the contrary, global competitiveness is the only way to maintain sustainability due to relatively low domestic growth. 

Designating some products as having to be purchased from local manufacturers does not mean paying a higher price for those products or obtaining goods of inferior quality. Moreover, it should not create the possibility that the price and quality differential between local products and imports will grow because local firms are no longer subjected to the discipline of foreign competition. By contrast, foreign manufacturers’ innovations and quality improvements must always feature in the development plans of local fabricators.

Saisi is aligned with Anthony Altbeker when he says: “Perhaps the most important thing about localisation policy is that South Africa’s poor economic performance over the past 13 years has nothing to do with any supposed ‘over-propensity’ to import and everything to do with a range of self-inflicted policies and governance injuries. These include our inability to keep the lights on, our decaying infrastructure, the container terminals at our ports being costly and inefficient, the deepening fiscal crisis, rising levels of lawlessness, and our education system’s inability to produce adequate numbers of skilled workers.”

It is essential to recognise that the Department of Trade, Industry and Competition has sought to reinforce the localisation policy by insisting on industry development to ensure higher levels of competitiveness. Its approach is supported by the firms that benefit and will be monitored for their successes. 

South Africa is fortunate to still have a manufacturing footprint after the economic challenges of the past 10 years. However, it is at the precipice of being lost and the choice to retain it or lose it forever lies with all South Africans. 

It will be disastrous for South Africa not to afford a level playing field to its steel production, steel-related manufacturing and industrial capability, thereby limiting the sector’s contribution to the country’s growth and development. The goals of growth in demand, increased employment, increased beneficiation and certainty of supply in the steel industry are laudable and to South Africa’s enduring benefit. DM/BM

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All Comments 2

  • I find this article rambling and impenetrable. Is there a problem with import quality? – industry specifications and quality control. Is there dumping? – tariffs. Is there supply shortage? – apparently not. (No problem with the economic multiplier effect, based on imports.) Is local production uncompetitive – yes, we shoot ourselves in the foot. Yet localisation is the solution? How?

  • Replace the article with: In order to maintain a strategic foothold in the SA steel industry, it was necessary to tilt the table in favour of our industry by means of localisation requirements, and so you, dear citizen, will be required to contribute to the costs.

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