On 15 June 2023, Minister Ebrahim Patel extended the ban on the export of copper and steel (except stainless steel and manufacturing scrap) for another six months. If you already have an export permit in hand, it would seem you can still export, but no new export permits will be issued.
Why do we have ban on scrap metal exports?
According to the Department of Trade, Industry and Competition (DTIC), the export ban is there to
- undermine the ability for thieves to sell and monetise their stolen goods, and
- decrease the incentive to steal metal, by lowering the payoff and increasing the legal risk involved in illicit transactions.
It’s a helluva thing, this stolen infrastructure business and its good to see government putting their back’s into sorting this out. Unfortunately their efforts seem to have done nothing to stem the tide of ever more stolen cables. The thinking goes that if you force down the prices of these products enough (remove the market), then people will lose their incentive to steal. When the ban was first proposed on 5 August 2022, the DTIC issued the proposed export ban policy for comment and in that document identified the ways stolen scrap metal could be monetised:
- it is exported as scrap metal
- it is melted into crude billets or ingots, or chopped, shredded or granulated, and then exported as semi-finished metal; and
- it is melted into crude billets or ingots, or chopped, shredded or granulated, and then further processed into finished metals, at which point it is either exported or sold locally.
Given the ban only covers the tariff codes for copper and steel scrap, it follows that the export ban will only affect the exports of scrap steel and copper, if correctly declared to Customs. It would seem the DTIC’s hope of catching dangerous criminals because they develop a conscience when they declare their exports to SARS, has been dashed. The DTIC, anticipating exactly this, in the same gazette state
“[T]raders often make false declarations for their exports. Copper scrap is often declared under a non-copper export HS code (e.g. steel or another metal). Moreover, scrap metal is routinely exported under a semi- finished HS code, even when the product is still in scrap form and has not been processed into semi-finished product. Exporters utilise this tactic to evade the more stringent conditions currently applied to scrap exports, including the application of the price preference system (the “PPS”) and export duties”
Scrap copper export ban
Banning the exports of a product which is barely exported, it turns out, is quite ineffective. Let’s start looking at the exports of scrap copper from April 2010 to March 2023. This gives us 13 years of export data and an interesting pattern emerges. To start with, I have split the exports into (semi)-processed and unprocessed scrap copper. I have also split the data between the period before the Preferential Price System (PPS) and the post PPS period. PPS is the policy forcing companies to offer their scrap metal at a discount locally, and only if they receive no offers at the discounted price be given an export permit. I have then split the post PPS period into 2 pieces, the first being where PPS was settling in and ITAC was still regularly issuing export permits for scrap copper and then the final period, up to the present day, when such permits are incredibly rare and in fact, currently not issued at all.
You will see in the pre-PPS era, 97% of all copper scrap exported was unprocessed. Once PPS was implemented, you could still utilise permits issued before PPS was implemented and export until your permitted volume ran out. The same principle applies to the export ban, which is why exports still linger after the ban was imposed.
For a year after PPS was implemented (block 2), the ratio of processed vs unprocessed scrap copper shifted to 36% processed to 64% unprocessed, but its into the third period (where we are now), where the shift is truly dramatic, moving to 88% processed vs 12% unprocessed. Why do we see such a dramatic change in direction after PPS was implemented? Because semi-processed copper is not considered scrap, it does not require an export permit (this changed on 30 November 2022, but its still not part of PPS and so has no local offer requirements – the permit is thus merely administrative. There is also no export duty on the blocks). Don’t for a minute visualise processed copper as the export of anything particularly sophisticated. It’s simply different bits of copper scrap thrown into a furnace, resulting in a big ingot or slab of scrap copper now mixed together into a block. Here is an example:
Copper blocks. This is not a complex product
Melting scrap into blocks is however considered local manufacturing, despite there being no use for these blocks in their manufactured form. The result is that copper smelters can buy copper at the discounted PPS price, melt the scrap down and then export it in that form. Now look at the chart again. The copper scrap is still being exported, only now it leaves in the form of big blocks instead of scrap. Somewhat ironically, in the August proposal for the first ban of scrap metal last year, Minister Patel stated
“[E]ven when stolen metal gets exported as semi-finished or finished products, it is not possible to tackle this route by prohibiting exports for extended periods without undermining the local metal industry.”
The business of melting copper is only feasible because of PPS and because you can export the blocks, when you can’t export the scrap copper. Although copper melts at a much lower temperature than steel, it still consumes a lot of electricity to melt copper, a cost which would not be worth incurring unless those conditions were present.
But, I hear you say, there is still that little orange bit at the top of the chart which is unprocessed copper. This could still be stolen scrap copper and this, after all, is the scrap copper which has been banned.
In its unprocessed form, copper can leave either as brass (think taps), bronze (door knobs and hinges), refined or unrefined. Most processed copper scrap would be unrefined. Stolen copper is of varying levels of purity, so would mostly be considered unrefined copper. When different types of copper (not alloys like brass and bronze though) are melted together, the result would be an unrefined block of copper. Things can be confusing, so here are some examples showing the difference between a tap and copper cable. The cable is the middle picture.
From January 2016 onwards. SARS inserted extra detail into the tariff book, so we can now distinguish between these different types of copper scrap. The chart below shows the thin bit of orange at the top of the graph above, broken down into its constituent parts, from April 2017 to March 2023 (the period when the exports of unprocessed copper dropped to current levels).
You will notice that 89% of the copper exported was actually brass, bronze and refined copper. Placing a ban on scrap copper exports is thus placing a ban on exporting taps and door knobs, not copper cables. This is not where the problem is.
So where is the stolen cable going? This is not clear, but we know it is not leaving as scrap copper, making the ban ineffective. This is a problem because we need solutions which actually address the theft and there is no indication that this action gets us any closer to even slowing down the theft of infrastructure. Lest you think the yellow 11% slice accounts for the stolen product, think again. This is 3 873 tons (194 containers) and these containers are receiving a lot of attention from SARS. 400 tons of copper cable was stolen from Transnet alone from January to March 2023. We only know this because Transnet publish their theft data. Eskom and Prasa don’t, but its fair to assume that this number is a lot larger for these three together. SAPS refuse to provide theft data for infrastructure, claiming this to be confidential (it’s not).
Now the ban has been extended for another six months, without a shred of evidence that the ban worked the last time or why it will work going forward. This is the third time the exports of scrap metal have been banned, with none of the previous occasions reducing theft. Clearly this is not the solution to the theft problem.
Scrap steel export ban
The ban on scrap steel exports covers everything besides stainless steel and manufacturing scrap. There are broadly speaking, four sources of most of the scrap steel collected:
- Manufacturing
- Construction
- State Owned Enterprises (SOEs)
- Households
The single largest supplier of scrap steel to the market is Transnet. Prasa, Eskom and Transnet are the most affected by scrap steel theft, so these are the kinds of scrap we should be most worried about. There is no separate tariff code for scrap railway lines for example, making it impossible to track these exports. The chart below, however, shows how scrap steel exports have fallen 75% in the last 13 years, even while the rand has weakened significantly, which should be driving up exports.
I think its safe to assume the theft of scrap metal has sky-rocketed over the same period. If stolen scrap steel was exported as scrap metal, we should instead see surging scrap steel exports, but the opposite is true.
Even if every tiny piece of scrap steel was banned, it would make no difference because clearly the amount of theft has nothing to do with exporting scrap steel as scrap steel.
The IDC has an eye-watering debt and equity exposure of R15bn to the downstream steel foundry and mini-mill sector, a sector which is largely unable to sustain itself without the active intervention of government by way of PPS, export duties, cheap finance and now an export ban on scrap steel. To put this exposure into perspective, the market capitalisation of ArcelorMittal is ‘only’ R4.34bn and this is by every measure a more complex and more valuable business than the mini-mills, many of which are not viable even with the massive government interventions in the market.
What should be happening
Infrastructure theft remains a policing problem and this is where the focus should be. For the industry to be an ally instead of a target, effort needs to be put into better systems. All scrap yards need to be registered, but this register is not publicly available. In fact, I’m not even sure its automated, which means that when scrap is traded within the industry, there is no way to determine if the person you are trading with is a legitimate dealer or recycler. The scrap recycling register needs to be put online.
The sale of scrap for cash should be banned immediately. This is not a complicated step to take, yet it remains untaken, despite years of pleading with government to do exactly this.
The furnaces to smelt copper and steel should all be registered, in much the same way as SARS registers every premises where alcohol is made. Companies without registered equipment should be closed.
Clamp down on illegal electrical connections. I would be very suprised indeed if the illegal connections to the Eskom network are not using stolen cable.
It would seem as if causing economic harm to the recycling sector is of no consequence however.
Mail us at info@xagta.com to find out how XA can help the scrap metal sector