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Decision on scrap metal trade restrictions taken in ‘bad faith’

‘The price of scrap will collapse. This will take many of the smaller recyclers out of business’ – XA International Trade Advisors’ founder.
Image: Shutterstock

Government’s decision to extend the price preference system (PPS), which forces a discount on the local sale of scrap metal, and still introduce an export duty that was supposed to replace the system, seems to have been done in bad faith.

From August 1 both restrictions will run parallel for two years. Industry and trade experts say it is unreasonable, irrational and arbitrary. The decision is legally changeable.

Caroline Rheeder, associate director of customs at Cova Advisory, says although imposing the PPS and export duties simultaneously are allowed in terms of the World Trade Organisation, subject to trade agreement obligations, it does feel like over-restriction. “It might well be challenged by the industry.”

The Department of Trade, Industry and Competition (dtic) on Wednesday announced that the PPS will be extended for another two years to “support” the export duty.

This in effect means that scrap metal dealers will be subjected to a 20% discount price on their products when sold locally, and if they are allowed to export they will be subjected to an export duty ranging between 10% and 20% depending on the country of destination.

Rheeder, who chairs the custom working group of the South African Institute of Taxation and is vice-chair of the American Chamber of Commerce’s regional trade forum, says some industry players will most likely be priced out of export markets. The price received in the local market could also make their business models less profitable.

Disastrous decision

According to Donald MacKay, founder and director of XA International Trade Advisors, the decision is “disastrous”.

The price of scrap will collapse. “This will take many of the smaller recyclers out of business.”

MacKay writes in his regular blog that the decision, announced on Wednesday, was based on a “severely compromised process”. He says dtic minister Ebrahim Patel was advised by a “working group”, which was formed as part of the Steel and Metal Fabrication Masterplan. However, the minister will not disclose the identities of the members of his working group.

MacKay questions this secrecy, saying they “presumably” stand to benefit from the decision.

The International Trade Administration Commission (ITAC), the import and export regulator, recommended that the PPS be replaced by export duties since it was ineffective in offering foundries and mills affordable, quality scrap metal.

The Customs and Excise Duty Act was amended to allow the minister of finance to impose export duties whenever he “deems it expedient in the public interest”.

Secret discussions

But Patel was advised by “a working group” that it should be kept.  And, at the end of June –  five weeks before the implementation of the export tax replacing the PPS system – the minster said he was considering extending the PPS.

He gave industry players two weeks to comment.

Dtic director Umeesha Naidoo says it received feedback from “industry sources” that amendments to the PPS in October last year have been effective, therefore it should be kept.

The information it received was provided “on a confidential basis”. Questions about the demand for and supply of scrap metal in the local market from April this year (when the export tax was supposed to be introduced) to date were ignored by Naidoo.

Rheeder recommends that government publishes a report of its findings from the investigation on PPS and export duties, similar to the process when it finalises an anti-dumping or tariff change investigation. “It makes the process more structured and transparent. Why are there secret discussions with certain representatives?”

MacKay agrees and says industrial policy formulated in secret is a problem. “It is a compromised process that is more likely to lead to bad outcomes rather than good.

“If you are not alarmed at what happened here, you should be.”

The use of incorrect data

MacKay says the masterplan for growth and renewal of the steel and metal fabrication industry contains large, glaring errors relating to the recycling industry. For example, a company that is currently in business rescue and which is not producing, has been included in the demand calculation.

Rheeder also expressed concerns about the research and data used to calculate the demand for scrap metal in the local market. “It is important that decisions are based on facts and accurate information. We suggest consultation with the entire value chain to ensure government has a full understanding of the industry before policy decisions are made.”

She says having both programmes operating in parallel creates complexity for pricing in the scrap metal industry in the local and export market. “While prices in the local market may decrease in the short term, I would expect longer-term price increases as the export market shrinks because of uncompetitive pricing due to the export duty.”

This concern is brushed off the table by the dtic.

Naidoo says there is the potential to evade the export tax by exporting through free trade areas as well as “under-invoicing and misdeclarations”.

“Hence, the PPS will support the export tax to ensure compliance and the availability of affordable scrap metal for domestic consumers.”

The two provisions will “promote the availability of scrap metal for local beneficiation” and will not impose a double financial burden on a would-be exporter, she says.

Questions sent to the South African Revenue Service, which will be implementing the export duty through the Customs and Excise Act, were not answered. National Treasury, responsible for legislative tax changes, referred Moneyweb to the dtic.

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The real issue with scrap metal is that criminal gangs are quickly dismantling the infrastructure of the country by harvesting ( with impunity ) the street lights, traffic barriers, traffic lights, cell phone towers, abandoned government buildings and anything else they can lay their hands on. What is the plan here?

Exactly, I’ve had break ins where brass taps and copper pipes were stolen. Recycling is all good and well, but the criminality that goes with it is not.

It’s exactly what you said. You go to some areas and you can see how they’ve picked the infrastructure to the bone. Like vultures. Lamp posts dismantled to the ground. Railings missing from bridges. Pipes ripped out of buildings. Not to mention the biggest problem which is copper cables. And all of these materials get sold as scrap. To scrap dealers. It may be sold to local small time scrap dealers at first; however it eventually ends up in the hands of the larger, well-connected scrap dealers that are able to export these tax-funded materials overseas. And these dealers must know where the scrap comes from originally and they’re pocketing big time. So they can complain all they want. I welcome this decision.

I suppose an alternative could include a system where the origin of scrap materials need to be substantiated before it changes hands, which would negate the need for these new regulations, however the corruption in this country won’t allow for that.

Although recycling is a good thing, considering the situation in SA, recycling of metal must NOT be allowed. The damage to our infrastructure by scrap metal ‘suppliers’ , by far, outweighs the environmental benefits.

A farmer is an entrepreneur who uses the soil as a medium to turn sunshine and rain into cash flow. A scrap-metal dealer is an entrepreneur who uses the trade as a medium to turn manhole covers, railway lines, power cables, and fence posts into cash flow. The former is legal and the latter illegal, but the law is impotent to act against it because since BEE has been legalized, everybody is trying to empower himself by disrespecting property rights.

Price controls are very effective in bankrupting farmers and merchants. It will also prevent cable theft. The problem is, however, that criminals and smugglers don’t pay taxes and duties. So, once again, these taxes and duties are for law-abiding citizens only. The ANC ensures that the criminal trade will now operate without competition.

The criminal trade might indeed be avoiding the taxes and duties due to SARS but in all probability still contributing to the Loot-freely House ‘taxes’ – the ones delivered in brown paper bags.

What a quaint view of a farmer! No wonder the boars are struggling in the face of the future of farming being huge commercial operations run by experts and science. The olde time way is just for hobbyists and those trying to sustain people who should not have been born.

It like calling scrap metal merchants “iron producers”.

The decision was probably made to curb things like cable theft, to make it less profitable for criminals.
Let’s be honest, Donald MacKay can jump up and down all he wants but the industry has done NOTHING to stop the criminal activity. Because they are profiting from it.
Cut the head off the snake.

I have less than zero sympathy for scrap market. As a property owner that battles the extremely disrupting annoyance of virtually any piece of anything getting stolen, this:

Make it illegal with significant criminal recourse to buy scrap other than if:

1. Anything purchased is notified on system and then quarantined for a month. I get there and find cables or pipes that are not in system – criminal charge default. I snooze a month, all good.

2. Anything purchased can only be paid to a bank account on something similar to those approved beneficiary bank accounts one sees on internet banking apps. If scrap dealer has more than R100 cash on site – chain the yard closed for 90 days. You pay for scrap to any other bank account – penalty of 100 times the transaction value.

We better hope there is no market for used paint in China, or that will also get stripped off buildings.

End of comments.





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