Steel industry is buckling under skewed labour and tariff structures - Businesslive

21 October 2021 - Yesterday the National Union of Metalworkers of SA (Numsa) which had demanded an 8% rise, said it would settle for a 5% increase for the highest paid and 6% for the lowest paid. The strike in the steel industry has ended, but the sector’s deep structural problems continue.

Jonathan Katzenellenbogen

Yesterday the National Union of Metalworkers of SA (Numsa) which had demanded an 8% rise, said it would settle for a 5% increase for the highest paid and 6% for the lowest paid. The strike in the steel industry has ended, but the sector’s deep structural problems continue.

SA was once a big world player in the steel industry, but now the sector shows growing signs of being in terminal decline. Violence and threats around the now ended strike as well as poor business are pushing smaller businesses to the wall.  

Gordon Angus, executive director of the SA Engineers and Founders Association, one of the largest employer associations in the metal and engineering industry, says in recent weeks he has never heard so many owners questioning whether they should continue in business. This is unlikely to be bargaining talk related to the recent strike, as the forces undermining their businesses are real and growing.

It is an industry beset by multiple pressures, none of which can ease soon. Apart from labour and wage structure issues, an uneven tariff regime protects the country’s primary steel producer, ArcelorMittal SA (Amsa). But the downstream manufacturing sector then faces competition from goods that enter the country at low or no duty. An unreliable supply of high-priced electricity, logistics problems, and poor business conditions also make operating difficult.

Domestic steel consumption is about a third down and exports have been flat since 2007. From 2010 to 2019, employment in the entire sector dropped 17%, a loss of nearly 32,000 jobs.

Two cost pressures that could be tackled, albeit with great political difficulty, play a large role in the industry’s troubles. One is the way in which labour rates are settled. The other is the destructive effect of high tariffs on primary steel, the basic input. The status quo heavily favours large over small firms.

SA is burdened by an outmoded system of centralised bargaining under which wages settled between unions and a few, usually larger, employers can be legally imposed on “nonparties” in an industry. Larger players with economies of scale and pricing power can more easily afford union wage demands. For small metalworking shops, payroll can amount to 30% of costs, though these tend to average 15%. For the larger player, labour amounts to 2%-4% of costs.

A particularly burdensome cost pressure for many businesses is the high minimum wage in the steel industry. At R12,700 a month, the minimum wage is well beyond the economic value that most companies can obtain.

The steel industry minimum is now more than double that in the motor and furniture industries, and almost four times the national minimum wage. Lowering the minimum would at least help ease retrenchments, and in good times more could be hired.

Over the past five years the National Employers Association of SA (Neasa) has taken court action to prevent the bargaining council in the sector from extending wage deals to nonparties. Neasa members now reach deals on a plant level. While most firms still pay what emerges from the industry’s bargaining council, the old way of reaching wage settlements cannot be imposed any longer on the unwilling. In a statement Numsa said it would try to have the deal extended to “nonparties”. Given past labour court decisions, this seems unlikely, but if there is an extension the result would be more lost jobs and firms going out of business.

Another factor behind cost pressure in the industry is the unjust tariff regime to protect the mostly foreign-owned Amsa. In global terms Amsa is a midget and cannot compete as it lacks the vast economies of scale of Chinese and Indian plants. Yet an 18% tariff, reduced after the threat of court action to 10% on imports arriving from September, effectively forces local users into buying from Amsa.

That means input costs for a vast number of firms are far higher than they would be under a less protectionist regime. But the government is intent on upholding what it calls “localisation”, which in plain language is protectionism. This means domestic final products are often not competitive, even in the domestic market, as many finished steel products can be imported with little or no duty, due to trade agreements.

The battles over the imposition of centralised settlements and the uneven tariff regime to protect one company are fundamentally between large and small firms. If the industry is to emerge from its long decline, the preferences for the big players will have to be eliminated.

The government’s answer to these problems is an ill-conceived “master plan” which focuses on “localisation” and an infrastructure programme to push start the sector’s recovery. The sizeable government budget deficit and lack of interest by big investors in the country makes this unlikely. Better would be for the government to get out of the way by scrapping localisation and the parts of the labour laws that make them inflexible.

• Katzenellenbogen writes a weekly column for the Daily Friend, an online newspaper of the Institute of Race Relations

https://www.businesslive.co.za/bd/opinion/2021-10-21-jonathan-katzenellenbogen-steel-industry-is-buckling-under-skewed-labour-and-tariff-structures/

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