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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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1 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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2 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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3 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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4 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:
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5 Value added export scheme The following Industries were supported with these schemes: Pipe and Tube Conveyers Wire and wire products Construction Tin cans Mine support systems Automotive products Cell Towers Power Lines Drums
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6 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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7 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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8 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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9 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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