Presentation To The Parliamentary Portfolio Committee On Trade And Industry On The DTI’s

Industrial Policy Action Plan (IPAP 2)

Presented By:Nonkululeko Nyembezi-Heita, CEO

17 March 2010

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Discussion points

• Employment creation in South Africa pivot around a grant-based

incentive scheme

• Areas where more assistance could preserve and create

employment

• Leverage the public sector infrastructure investment programme

• Exchange rate volatility and strength

• Conclusion

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Employment creation in South Africa pivot around a grant-based incentive scheme

Selection of automotive components sector broadly positive for the primary steel industry.

The move away from tax-based incentives to a grant-based scheme likely to increase the administrative burden on the dti

The primary steel Industry created and maintained for more than two decades its own incentive scheme to entice downstream industry to utilize their dormant manufacturing capacity and to export their additional products not required by the domestic market.

Rebate payable represents the price difference between domestic and export prices effectively pricing steel at export parity levels for this campaign

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South Africa - Real domestic carbon & alloy steel consumption

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

Tonnes

per

quar

ter

0%

5%

10%

15%

20%

25%

30%

35%

Import

s %

Real consumption

% Imports

Consumption trend

Imports include alloy steel productsProfile product despatches estimated as from July 2008 - not all data available

Infrastructure development

Infrastructure development

Stagnant steel consumption – 3.6 to 4.5 million tonne per annum

Why did we support value added exports?

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Advantages of the value added export scheme

Higher domestic demand for primary steel created Foreign exchange earned by the downstream industries Driving the notion of value addition Domestic job creation as production unit utilisation increased Installing of new and optimizing downstream capacities Downstream sector became exposed to international markets via value

added products The following rebates have been paid out to exporters:

Rand (Million) 2005 2006 2007 2008 2009Value Added Assisatance 376 441 237 226 194

Import Substitute 133 143 111 115 22Cosm 46 56 38 40 36Total 555 640 386 381 252

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Value added export scheme

The following Industries were supported with these schemes: Pipe and Tube ConveyersWire and wire productsConstructionTin cansMine support systemsAutomotive products Cell TowersPower LinesDrums

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Areas where more assistance could preserve and create employment

The government needs to continue focusing on improving the infrastructure of the country such as energy, roads, ports and rail transport.

Though happening in places, leveraging the public sector infrastructure investment programme to the maximum remains a work in progress.

Real control regarding the localization programme in the public sector has not been achieved. Many contracts still source material internationally while sufficient supply was available in the domestic market.

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Areas where more assistance could preserve and create employment

South African downstream industries have to sort out some of their own deficiencies such as:

Non-competitive cost structures and towards this end the government could assist with best practice and benchmarking programmes to ensure best in class businesses in South Africa.

Uneconomical production units due to the absence of economies of scale can change when local content of infrastructure programmes contribute to better utilisation and trade policy counter dumped finished goods in the South African market.

Old facilities which do not compare to current new technologies could be upgraded with an accelerated tax friendly incentive scheme to lighten the burden of debt in the industry.

Uneven playing fields in the international market due to subsidies and incentives given by the governments in the exporting markets should be countered by similar instruments in our domestic market.

Imported sub-standard products should be regulated against to ensure that quality products are entering our markets and that locally manufactured products can compete on an equal footing.

Other non-trade barriers such as rail and port deficiencies should be solved and should receive the highest priority from our government.

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Exchange rate volatility and strength

The strong rand has reduced the profitability of exports, as the variability of the exchange rate has increased the risk of investing in export industries.

Predicting the exchange rate is very difficult and thus it has been equally difficult for

anyone contemplating an investment in the manufacture of goods for export to budget future income.

The result has been a dramatic decline in SA’s manufactured exports, from

approximately 1% of total world exports in 1980 to less than 0,4% currently. High interest rates and foreign currency speculation have further reduced the profitability

and increased the risk of investments in the manufacture of tradable goods.

The benefits of Rand appreciation are that it will temper inflationary pressures and in so doing enhance the chances of further interest rate reductions.

The negatives are that the country’s export sectors’ single main comparative advantage arising out of a cheap currency has been significantly eroded by a strong Rand.

In particular, manufacturing, mining and tourism sectors stand to be negatively affected and in so doing economic growth could also be jeopardized.

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Conclusion

The primary steel industry is ready to join hands with government to build our economy to achieve a better life for all

The Revised Industrial Programme Action Plan (IPAP) will boost confidence in the industry and should support further investment in industry productive capacity, particularly in the component manufacturing sector.

The Revised Action Plan identifies a number of priority sectors, including the vehicle and component manufacturing industries, creating employment. These industries are all steel related.

IPAP2 also proposes the provision of support and assistance to encourage the production in South Africa of electric vehicles and related components which will boost steel related fixed investment.

IPAP2 will boost business confidence in the manufacturing sector and should support further investment in the sector.

Macro- and micro-economic policies will be more in line and thus the promotion of investment in certain sectors will have a positive impact on steel sales to the construction sector.

IPAP2 will enhance inward industrial development which will have a positive effect on the balance of payments.

The new plan would focus on opportunities in capital goods, transport equipment and metal fabrication, which will boost steel demand.

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END