Here is what we know. Metal infrastructure is being stolen at an increasing rate and the volume of scrap metal being exported has been falling. That second point might not feel right, but it is, and this simple lack of correlation is at the heart of why banning the exports of scrap metal won’t work to curb the theft of metal.
Scrap metal exports from July 2011 to June 2022
The thinking goes that if you curb the exports of scrap metal, you will flood the local market, suppressing the prices thieves can obtain for their stolen loot and thus disincentivize the theft. But this makes three important assumptions, none of which is supported by evidence. Firstly, that the stolen metal is traded at local market prices, or a reasonable derivative thereof, and secondly, if the price does drop in the illicit market, thieves won’t steal more to make up the shortfall. Thirdly, we need to assume the thieves are accurately declaring their exports to Customs, so their stolen material is impacted by the ban. There is little evidence that the criminals develop a conscience when they need to declare their exports to SARS.
I am not sure where the idea originated that when metal is stolen it is exported. Recyclers collect around 3.5m tons of ferrous scrap and another 300 000 tons of non-ferrous scrap per annum. We then export around 496 000 tons of scrap metal (13%).
The theft of copper cable has brought the South African economy to its knees, so stolen copper is a big deal indeed. We seem to assume that most of the stolen copper is exported, so with the global copper price up surely the thieves are exporting copper scrap by the shipload. You would be wrong.
Copper scrap is exported in two forms, being as the scrap product or melted down into an ingot, blister, or shredded into little pieces. All of the semi-processed versions of copper scrap have the common characteristic of being denatured. You simply cannot identify if stolen copper has been mixed in once you melt the copper into blocks. The pictures below are of copper scrap.
When the scrap has been smelted or granulated, the outcome are the two pictures below. The copper blocks in the left picture are blister blocks. These are an unrefined product (you put all kinds of different copper into a furnace and what comes out are those one – or more – ton blocks). These are then sold locally or exported. Importantly, these are not treated as scrap metal and require no export permits. They don’t attract the 10% export duty on copper scrap, with these smelters being considered by the DTIC as a manufacturing process.
If we look at the pattern of copper exports, you can see the drastic drop in export volumes of copper scrap (the blue bar), down by 98% from 2012 (when there was no PPS) to 2022 when there was both PPS and an export duty. All of this is happening while the global price of copper has been rising (the orange line).
Copper scrap exports from July 2011 to June 2022
At the same time, you see the exports of semi-finished copper surging by 5 807% (the orange bar below, which looks like a sliver at the beginning). In 2012, 93% of copper exports were of scrap and in 2022, this has fallen 23% of the export volume. If you look at the pie chart, you can see that 99% of the copper scrap exports are brass, which is not used in cabling.
Exports of copper scrap and semi-finished copper from July 2012 to June 2022
Put differently, we have had an effective export ban on scrap copper (apart from brass) while the theft of infrastructure has been surging.
Now some might reasonably think, that the chart above merely shows that the stolen copper is being exported elsewhere, perhaps even in melted down form, but if this is correct then the ban won’t work because these products are not covered by the proposed ban.
What is covered by the proposed ban?
This is an interesting question. 54% of the products covered by the proposed ban are not scrap metal or even made from scrap metal. The chart below gives this breakdown, by both volume and value. Given the ban is supposed to be in place for six months, the chart shows the last six months of exports under the tariff codes in the proposed ban.
Of the 54% of semi-processed product added to the ban, 97.5% of this is unwrought aluminium (think aluminium billet) and most of this is not made from scrap. The value of unwrought aluminium exports in the last 6 months (Jan to June 2022) was R13.9bn (342 000 tons) and most of this was shipped from Richard’s Bay. We can all make a good guess about who this exporter is likely to be. Importantly, the copper ingots and granulated copper are not included in this proposed ban.
Ferrous scrap is included in the proposed ban, but here things become very strange too. Of the 3.8m tons of scrap metal collected each year, around 3.5m tons is ferrous (92%). The biggest legitimate generator of ferrous scrap is Transnet. On 1 June 2021, the Chief Executive of Transnet issued an instruction to Transnet employees reminding them that
…the auction of scrap has been put on hold as Transnet will be selling off directly to the steel producers and as such no movement of scrap may be processed except for the transportation of operation scrap bin to the TFR scrapyards…
By removing competition for the scrap, Transnet immediately devalued the returns they earn on this scrap metal, giving a direct benefit to the small number of mini-mills and foundries. The biggest local consumers are Scaw Metals, Cape Gate and a number of smaller mini-mills.
The largest consumer of stainless steel scrap is Columbus Stainless (over 90% of all stainless steel scrap metal). Columbus has however stopped buying stainless steel scrap, we think because they lost access to the EU, when a steel safeguard duty in the EU was extended to South Africa. This seems to have happened because South Africa’s export volumes to the EU overtook the threshold for developing countries to be exempted (3% of total import volumes into the EU) and the duties then applied. We don’t yet know if the SA government or Columbus responded to the safeguard decision in the EU. Whatever the reason, Columbus has put out a notice that it will not buy stainless steel scrap for the forseeable future, leaving over R1bn in scrap metal with nowhere to go if the ban is put in place. This scrap will devalue rapidly after the ban and a lot will probably end up in landfills.
The ferrous story doesn’t end there though. Although we generate more ferrous scrap than we consume locally the mini-mills, in the form of the South African Iron and Steel Institute (SAISI), have launched a petition to ban the exports of scrap metal. This petition was not only created and distributed by SAISI, but further promoted by the DTIC to the media, making things a little awkward.
We should bear in mind that when the gazette was published on 5 August calling for comments on the proposed ban and other interventions to curb the theft of stolen metal, it was initially published as an immediate ban on the exports of scrap metal. This gazette was retracted the same day, but it is interesting to consider the DTIC’s full-throated support for the ban while having a gazette banning the exports ready to be implemented.
Just like all other scrap metal, the volume of ferrous scrap exports has been falling, while global prices rise.
A history of lobbying for export bans
Despite the devastating impact a full export ban would have, affecting over R16bn of exports in 6-months if implemented as proposed, there are a small number of very large winners from this process. The companies who buy the scrap metal at increasingly lower prices will of course see their margins surge as their raw material prices are forced down, while the products they manufacture sell at global prices. The shadowy group of companies, known as ‘the working group’ have been pushing for increasingly stringent PPS rules, which has forced down local prices and also lobbied for the imposition of an export tax on top of the PPS. This request was granted in August 2021.
On 3 July 2020, Minister Patel banned the exports of scrap metal for two months, quickly extended to three months. The banning gazette notes:
The Minister has received representations from the domestic consuming industry that there is a shortage of affordable scrap metal and the price preference system is not achieving the objectives of the Policy Directive, which is causing severe harm to the industry and affecting its recovery from the destructive effects of the COVID-19 global pandemic. The representations request that urgent action be taken to remedy the situation.
On 24 June 2021, Minister Patel proposed extending PPS to run concurrently with the new export duties. Up to this date, the consensus from everyone in government was that PPS would be replaced with export duties, not be extended to run in parallel. But why did this happen? According the 24 June gazette:
Following the recommendation from the working group on scrap metal… taking into account the recently adopted Masterplan for the steel industry, the Minister is considering extending the Policy Directive [PPS] for a further period of two years from 31 July 2021 until 31 July 2023 to support the export tax and to enable consideration of the implication of having both systems in place to support the availability of affordable scrap metal for the domestic consuming industry.
A number of things jump out from this statement. Who is the ‘working group’ and why would a group of companies in the steel sector be calling for the extension of PPS on ferrous and non-ferrous metal?
It turns out that the ‘working group’ are made up of people representing the DTIC, ITAC, Solidarity (the trade union) and scrap consumers such as Scaw Metals, Reclam Group and Naledi Holdings (a foundry). The DTIC were one of the parties recommending to the Minister of the DTIC to extend the PPS along with export duties. Scaw Metals, the largest consumer of scrap steel was part of this group, as is Reclam, one of the companies who convert scrap copper into ingots. The push for the ban is being driven by SAISI, whose members, according to their website are Scaw Metals, Cape Gate, ArcelorMittal and Columbus Stainless.
The winners from the ban are very clear. What is not clear is why government is part of this ‘working group’ and why the identities of the members were kept secret.
Who funds the winners?
If there are winners, then their windfall must come from somewhere, so where is that?
Scrap metal is generated by mines, construction companies, factories, SOE’s and households. Every generator of scrap metal will earn less in recoveries for the scrap their process generates. When the price of scrap metal drops, as is the stated intention of the policy, then it follows that the 350 000 waste pickers will earn less. These are already the poorest people in the country. The proposed solution is for the waste pickers to collect other recyclables such as paper, glass and plastics, but this makes the assumption that this is not already happening. We don’t begin generating more glass and plastic when the the value of scrap metal falls.
A secondary problem is the volume/value relationship between the different materials. Metal is dense and heavy, whereas plastic is light. This means a waste picker has to collect considerably more plastic to generate an equivalent income to what s/he would earn collecting metal waste.
Manufacturers generate crucial cost recoveries from their waste stream. As the scrap metal recoveries decline, so the competitive pressure will increase on the already beleaguered manufacturing sector. Companies may be prepared to suffer these losses if there was any evidence that the export ban would indeed reduce the theft of infrastructure, but no such evidence has been put forward and it is not clear if it exists.
What happens next?
We don’t know. The matter was debated in the National Assembly on 1 September 2022. Beyond that it is all a little opaque. We know that Minister Patel has clearly stated his support for a ban, so it is unlikely the DTIC will arrive at a different conclusion (remember the DTIC circulated the SAISI request for the ban, prepared the gazette banning the exports and made the recommendation, by way of the ‘working group’ to extend PPS on top of export duties). The DTIC also took the decision to not include semi-finished copper on the ban list, although they are proposing to add it to the list of items which will require an export permit.