ChromeSA says proposed export tax will not bode well for local producers

3rd November 2020 By: Marleny Arnoldi - Deputy Editor Online

Industry organisation ChromeSA says the proposed chrome ore export tax would have a devastating impact on primary and upper group two (UG2) chrome producers, given that they sell the bulk of their production for export.

Cabinet earlier this month approved measures to support the domestic ferrochrome industry, including through an export tax on chrome ore.   

“It is clear that insufficient thought has been given to the financial consequences of such a tax and its inevitable impact on direct and indirect jobs, associated industries such as transport and logistics and on communities," states the organisation.

Of further concern to ChromeSA is that there is "no clear benefit to the ferrochrome producers themselves from the proposed tax.

"Any suggested benefits would, at best, be short term and would be rapidly eroded by the significant negative impact South Africa’s ever-increasing electricity tariffs continue to have on local beneficiation," it states.

ChromeSA is also worried about the "failure by those working on the proposed tax to engage meaningfully on this issue, seemingly oblivious of the consequences of a tax on primary and UG2 chrome ore producers, their employees and their communities."

The organisation is calling for a comprehensive and transparent engagement process with all affected parties before the proposal is developed any further.

“It is the view of ChromeSA that the proposed tax is entirely speculative as regards the outcomes its supporters expect it to achieve and that several significant incorrect assumptions have been made by the proponents of the tax.

“These include that SA chrome ore producers have such extreme market dominance that they are able to pass on the export tax to Chinese ferrochrome producers without losing sales in the export market – therefore, an assumption of no harm to South African chrome ore producers.”

The organisation continues, explaining that international chrome ore producers have excess capacity which can replace South Africa chrome ore in sufficient volumes to cause harm to local chrome ore producers.

China’s buying power remains extremely strong and China would, in all likelihood, resist attempts to simply pass on the tax to Chinese producers, ChromeSA states.

"It should be emphasised that any export volumes or revenues lost by the non-integrated chrome ore producers are unlikely to be recovered through increased domestic sales given that the ferrochrome producers in South Africa have substantial excess chrome ore supply over and above their internal use requirements," it states.

Significantly, the South African ferrochrome sector’s chrome ore input costs are about 50% lower than those paid by the Chinese producers.

Apart from South African chrome ore producers not being in a position to simply pass on the tax to Chinese ferrochrome producers, China also has various credible responses available to it to protect its ferrochrome sector.

For example, ChromeSA says there is ample scope for China to increase support for its domestic ferrochrome and stainless steel industries to counteract any impact of the tax – such as increased subsidies, aggressive industrial financing and other incentive programmes.

There is also clear potential for the implementation by China of a retaliatory trade policy, such as import duties on South African ferrochrome, the industry body states.

Further, the stainless steel and ferrochrome sectors in China have a close relationship and could absorb the effects of the tax. Any of these likely responses by China would render the proposed tax ineffective in benefitting South African ferrochrome producers.

ChromeSA states that the proposed tax will not necessarily undermine the competitiveness of the Chinese ferrochrome sector relative to South African producers.

“But even so, any benefit to local ferrochrome sector would likely be highly diluted by several additional factors.

“If the costs of Chinese ferrochrome producers were to increase because of a tax, it does not necessarily mean that Chinese stainless producers will accept a higher price or greater volumes from South African producers – in fact such increases would provide an opportunity for other ferrochrome producers around the world, who have their own chrome ore supplies, to increase their market share with Chinese stainless steel producers, and minimise any price rises for SA ferrochrome producers,” the organisation notes.

Additionally, only about 50% of South African ferrochrome exports – those to China and Indonesia – would potentially benefit from the tax.

Sales of South African ferrochrome into all other international markets compete primarily against international ferrochrome producers who have their own sources of chrome ore and therefore would be largely unaffected by the tax.

Lastly, rising South African electricity prices, the true cause of the ferrochrome producers’ lack of competitiveness, will erode any potential benefit gained within a few years.

South Africa’s integrated ferrochrome producers themselves export significant volumes of chrome ore, so any export tax would have a material negative impact on them as well.

ChromeSA and its constituent companies say they are open to all necessary engagements, and to assisting in finding a sector-wide solution, but not at the expense of the future of its employees, communities and investments.