South Africa's scrap metal sector is overinvested, international trade consultancy XA Global Trade Advisors director Donald Mackay says.

"I think we've got a very weird situation, as scrap metal doesn't really behave like any other product. As demand for any product rises until the supply rises to match it, the prices would normally go up.

“What's happened here is the demand has been artificially inflated because you have friendly finance terms out of the Industrial Development Corporation (IDC), and you've got discounts guaranteed on your raw materials, and if somebody doesn't buy the goods locally, then the exporter still has to pay an export duty,” Mackay tells Engineering News.

He explains that this artificially inflated demand is compounded by the fact that no one establishes factories to produce more scrap metal, meaning the supply is determined by the state of the economy. This situation creates a precarious market.

"What's happening is you've got the increased demand, because these terms are very friendly, but you can't increase the supply. At some point, that means some people are going to run out of money, presumably, or are not going to be able to buy enough of the raw material, and because you can't put more of it into the market, it creates this precarious situation,” he notes.

He cites the case of the Kamal Cisco iron and steel mini mill in Cape Town, which was put into business rescue by the IDC and had a significant investment written off.

"The IDC wrote off R300-million on that particular investment," Mackay says, cautioning that the development financier also has other, even larger, mini-mill exposures.

He notes that the major scrap metal suppliers are the manufacturing sector and State-owned enterprises such as Transnet. However, Transnet's shift from public auctions to selling directly to mini mills and foundries has also skewed the market.

"If you have a look at the situation with Transnet, you've also created an artificial situation. Transnet used to sell their scrap metal on public auction, which would get them the best price. But as part of the process of protecting the mini mills, an instruction was issued that they may no longer sell their scrap metal on public auction, so now they can only sell to mini-mills and foundries,” Mackay explains.

He says this change benefits the mini mills and foundries by increasing their volumes but adversely affects Transnet's revenue, thereby distorting the broader scrap metal sector.

"The foundries and mini mills get their volumes pushed up. But Transnet, which is financially severely constrained at the moment, earns less on its scrap – and these are not small amounts of money. So the impact becomes really large, and it distorts more than just the scrap metal sector,” Mackay notes.

XA has recently launched a new online platform called MyScrapMatters, which is a centralised hub for providing comprehensive information and up-to-date, aggregated data on the scrap metal industry in South Africa.