Proposed Chromium Export Tax: Report Highlights Risks …


The tax aims to stimulate the South African ferrochrome industry and further the cause of industrialization and enrichment and all other concepts that the Department of Trade and Industry is keen to bring under visible hand of the developing state. (Photo: Unsplash / Ricardo Gomez)

A recent South African government proposal to impose an export tax on chromium ore could hit the industry hard and backfire, according to a report prepared for domestic producers.

The proposed tax, which was announced in a Cabinet statement on Oct. 21, took the industry by surprise. Apparently, it aims to support “domestic ferrochrome production and its sector of the chromium value chain”. Ferrochrome is processed from chromium ore and is a key ingredient in the production of stainless steel.

ChromeSA, a group of nine South African chrome producers – including Anglo American Platinum, Sibanye-Stillwater, Tharisa, Northam Platinum and Assore – commissioned economics consultancy Genesis Analytics to assess the proposed tax and its potential consequences.

According to its report, which was released Thursday when Chrome SA hosted an online briefing on the matter, the intention behind the tax is to:

“… Increase the cost base of Chinese ferrochrome producers. It is argued that this would shift the supply preference of ferrochrome produced in China to ferrochrome produced in South Africa. [either in terms of a higher price or increased volumes], thus improving the prospects for South African ferrochrome producers. It is immediately evident that this logic depends on how other players in the global ferrochrome value chain change their behavior in response to the tax. “

Thus, the tax aims to stimulate the South African ferrochrome industry and further the cause of industrialization and enrichment and all the other concepts that the Department of Trade and Industry (the dti) holds. to be led under the visible hand of the developing state. . The dti did not respond to a request for comment before going to press.

The Genesis Analytics evaluation highlights the pitfalls of this policy.

“The chromium ore sector has grown considerably over the past decade, both in terms of production [almost doubling] and employment. Growth in the sector has been mainly driven by increased production driven by exports from non-integrated South African chromium ore producers. [both primary ore miners and UG2 producers]. These exports are sold almost entirely to the Chinese ferrochrome sector and have positioned South Africa as the largest international player in terms of global sales of chromium ore, with a significant margin, ”he notes.

In contrast, the South African ferrochrome sector has withered on the vine and has been in decline in the face of soaring electricity costs – Eskom, as is often the case, one of the culprits here – and the aggressive expansion of Chinese producers.

“As a result of these trends, it is estimated that the primary non-integrated chromium mining industry currently employs 9,528 workers, far more than the downstream ferrochrome industry with 6,851 workers,” the report said.

The proposed export tax – 30% has been discussed but no level has been set publicly – is supposed to work roughly like this: SARS would impose it and collect it from the United States. exporter, who would then attempt to recover it by adding to the price paid by the importer. This would make South African chromium ore more expensive, making Chinese ferrochrome producers less competitive.

The reasoning here seems to be that the Chinese need South African chrome ore, so they have more than a barrel of it. But the Chinese may not see it that way.

Notably, as a direct result of the tax, the cost structure of major chrome ore producers in South Africa will increase above that of marginal producers in Turkey and Zimbabwe.

Indeed, the report contains five key findings which suggest that caution should be exercised on the matter.

First, he notes that: “While export taxes on raw materials in the metals value chain have been used to improve downstream valuation, the objective of the mechanism has mainly been to secure domestic supply. . To our knowledge, there are no clear examples where an export tax has been used … to directly disadvantage other international downstream competitors. In this regard, the logic of the proposed tax on chromium ore in South Africa is somewhat new.

So, it’s kind of an experiment. What could go wrong?

Second, there is a risk that South African chrome ore producers will be replaced by foreign competitors. “It is estimated that 22-32% of South Africa’s current supply to China could be vulnerable to a potential displacement of international producers if the tax were to be added to the export price.

“Notably, as a direct result of the tax, the cost structure of major chrome ore producers in South Africa will increase above that of marginal producers in Turkey and Zimbabwe,” the report said. Remember – all recent promises from the Presidency and the Treasury regarding reduce the cost of doing business in South Africa. Someone did not receive this memo.

Third, Chinese ferrochrome producers have significant countervailing powers. Yes, China depends on South Africa for a lot of its ore. But South Africa is “almost totally dependent on China as a buyer of chrome ore for export.” It goes both ways and do you really want to shake up your biggest customer?

Fourth, the report states that: “In order to benefit South African ferrochrome producers, it is necessary that the tax provide sufficient incentive for stainless steel producers in China to shift away from Chinese ferrochrome supplies for South African producers; and / or accept a higher price for the South African product. An easy response from China would be to apply tariffs on imports of ferrochrome. Does South Africa want to follow Donald Trump’s clumsy example and start a trade skirmish with China? Chinese industry is also known to be forward thinking, and China has considerable stocks in reserve.

Finally, the tax would only have a very limited impact.

“It is important to recognize that the proposed tax only decreases the competitiveness of foreign ferrochrome producers who depend on South African chromium ore – and even here the extent of this impact is questionable… The logic of the proposed tax does not diminish the competitiveness of countries which depend on their own chromium ore for the production of ferrochrome.

The bottom line is that “there is a material likelihood of significant job losses in South Africa’s non-integrated chrome mines without a compensating increase in employment in integrated mines.”

So it could turn into a classic case of South African government policy – however well-meaning – backfired and leading to job losses rather than job creation. We have already seen this, which is why the unemployment rate is north of 40%. DM / BM

The story has been corrected to reflect the briefing which was hosted by ChromeSA, not the Minerals Council SouthAfrica.

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