IS THE PREFERENTIAL PRICING SYSTEM IN THE SCRAP METAL INDUSTRY WORKING?

By Yonatan Sher,Virusha Subban Tuesday, March 01, 2016
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In August 2013, amid vociferous protest and unsuccessful legal challenges from the metal recycling industry, the Economic Development Department pushed through a new directive that gave the International Trade Administration Commission (ITAC) the power to bar exports of both ferrous and non-ferrous scrap metal unless the metal is first offered to domestic purchasers at a 20% discount to the prevailing international price. This discount has subsequently been increased to up to 30% on some types of scrap metal in a 2014 amendment to the guidelines. An export permit will only be approved by ITAC if domestic users have not taken up the offer to purchase the scrap after 15 working days.

The road to this Preferential Pricing System (PPS) policy was paved with the best intentions. It was an attempt by Government to stem the tide of South Africa’s continuing deindustrialisation, against a backdrop of many local foundries and other beneficiators closing shop or significantly decreasing their production capacities. One of the main issues identified was that high volumes of scrap metal exports were depriving the local beneficiators of affordable and quality key inputs in the manufacturing process. Scrap metal accounts for a large percentage of the beneficiators’ input costs, and the struggling and distressed beneficiation sector welcomed the 20% to30% reduction although it recognised that the PPS was an imperfect long-term solution.

However, over two years later, it is clear that the PPS has experienced noticeable teething problems.  Empirically, there has been insignificant impact on the tonnage exported before and after the introduction of the PPS. According to the Minister of Economic Development replying to a question posed to him in the National Assembly, as of September 2015 more than 94% of applications to export scrap metal were approved by ITAC.

The beneficiation industry complains that the restrictions have had little or no effect in bringing down the price of input costs for beneficiators, and some have even complained of prices increasing.

On the other hand, scrap dealers complain of tonnes of waste metals piling up in their scrapyards due to the time delays involved in first offering local industry, then applying for a permit and waiting for it to be granted.  The scrap dealers argue that although most applications may be approved, all delays in the movement of the metal increase their exposure to commodity market risks and precipitate cash-flow issues.

Blame for these failures is liberally apportioned by both the scrap-metal industry and the beneficiation sector.

The beneficiators have accused scrap merchants of circumventing the PPS system using a range of tactics that force beneficiators to forego the mandatory discounted offer. Such tactics include inflating the preference price by charging for delivery over and above the quoted price, demanding impossible sale conditions, upfront cash payment or reams of documentation before selling to local buyers.

The scrap merchants have in turn blamed beneficiators for making frivolous offers to purchase scrap just so that ITAC will deny or delay the permits and thus frustrate their exports. They complain that some local buyers object to the permit but do not provide payment terms and do not collect the goods, or fail to pay on time.

What everyone agrees on is that the system is simply not working.

To address these concerns, amendments to the PPS policy were proposed in December 2015. The deadline for comments on the proposed amendments was 5 February 2016, and ITAC has indicated that it is now collating and processing the input it received from the various stakeholders.

Notwithstanding the fact that ITAC is considering the comments, it is apparent from the proposed amendments that Government’s response to the failure of the PPS has not been to address the economically unsound root of the issue, and approach its goals from a new angle, but rather to address the symptoms of a flawed system and ramp up enforcement, increase controls and crack-down on illegal exporters. Examples of such measures are the proposed new requirements for more detailed documentation to be submitted to ITAC before export permits are granted, a ban on cash payments for scrap so as to make the money-trail easier to trace, and the requirement that all scrap metal be exported only through the Port Elizabeth harbour so as to monitor and control the process to a greater degree.

However, what Government has missed is that the tension, and indeed open acrimony, between the scrap metals industry and the beneficiation industry has its source in a solution foisted upon them by Government instead of a comprehensive negotiated partnership between the sectors. What makes this the more disappointing is that such a negotiated, industry-driven solution was imminent before Government first introduced the PPS policy guideline in 2013. Industry players such as the Metal Recyclers Association of South Africa, the South African Institute of Foundrymen, and Business Unity South Africa among others, were engaged in discussions around a way forward for the industry.

A report was also commissioned from Conningarth Economists, an expert analytical firm, to advise on solutions that would have the least detrimental effect on all sectors of the economy. Unfortunately, due to the timing of the discussions and the report, it appears that they did not influence Government’s original proposals, and the new proposed amendments have not reconsidered the underpinnings of those original guidelines.

We have now another opportunity for Government to craft industry-driven solutions instead of pursuing failed policies more zealously in an empty bid to salvage them.

If Government yet again fails to avail itself of this opportunity to heed the voice and, more importantly, get the buy-in of the scrap metals industry and the beneficiation industry, then the proposed amendments could be open to legal challenges on the ground that they unnecessarily restrict freedom of trade.

Virusha Subban, partner specialising in customs, excise and international trade, and Yonatan Sher, candidate attorney,  Bowmans