Industrial policy under democracy: apartheid's grown-up infant industries? Iscor and Sasol

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Simon Roberts; Zavareh Rustomjee (2009). Industrial policy under democracy: apartheid's grown-up infant industries? Iscor and Sasol. Transformation: Critical Perspectives on Southern Africa, no. 71. Transformation.

Type	journal article
Scope	Post-1994 South African economy
Method	mixed
Period studied	1928–2008
Regions	South Africa, Gauteng, Saldanha, Mozambique
Themes	manufacturing industrial policy, business and state, transition post apartheid, comparative theory, origins segregation
Citation key	roberts2009b

Argument

The authors argue that Iscor and Sasol, state-owned enterprises built under apartheid around the minerals-energy complex (MEC), have 'grown up' into internationally competitive firms. Post-1994 industrial policy strengthened these upstream firms but failed to engage with their market power, especially import parity pricing. The result was weak downstream linkages, little diversification, and entrenched MEC interests. Using the two case studies, they argue that sector policy must be set within a political economy understanding of the MEC as a system of accumulation, and that the state must use all its levers (regulation, ownership of resources, infrastructure, competition policy).

Evidence and method

Secondary literature on the MEC (Fine and Rustomjee 1996), Quantec sectoral GDP data, input-output data, company presentations and results (Iscor/Ispat Iscor), IDC and DTI documents, Competition Tribunal rulings (2007), the National Treasury windfall tax task team report (2007), and sector studies (PARAS 1998, Dobreva et al 2005). The authors' own earlier work and expert witness experience also feed in.

Findings

• The steel industry is large relative to the downstream metal products sector, which is underdeveloped compared with industrialising peers. (p. 8)

  Measured by value-added the metal products sector is less than two thirds the size of the basic iron & steel sector while in industrialising countries such Chile, Malaysia and South Korea it is of similar size or greater

• Iscor dominated the domestic steel market. (p. 8)

  Iscor accounted for over two-thirds of local sales of all basic carbon steel products over the past decade, and 80 per cent of flat steel products.

• Trade liberalisation cut steel tariffs sharply, yet the steel sector kept growing and exporting. (p. 8)

  tariffs on steel reduced sharply from 30 per cent in 1994 to 5 per cent in 1996

• Iscor shed labour in the late 1990s while value added grew strongly after major investments. (p. 9)

  Employment was cut sharply, by over one-third in the second half of the 1990s, while value added grew strongly from 1999 following major investments.

• Mittal acquired a low-cost producer whose capital investment had been made by the state. (p. 10)

  In effect, Mittal acquired one of the lowest cost steel producers in the world, with the capital investment having been made by the state

• Import parity pricing meant local steel customers paid far more than export customers. (p. 11)

  the net price for steel sold to local customers at the import parity level has been some 60 per cent or more above that received for steel sold to export customers.

• Competition enforcement against Iscor has had little practical effect so far. (p. 13)

  In 2007, the Tribunal found Iscor's pricing to be excessive, imposed a fine of 5.5 per cent of turnover

• Sasol failed to deliver the downstream jobs promised in exchange for continued synfuel protection. (p. 16)

  agreement was reached between Sasol and government to retain protection should oil prices fall below $16/ barrel, in exchange for Sasol agreeing to create 50,000 sustainable downstream jobs.

• Upstream incentives strengthened capital-intensive stage 2 chemicals and impeded downstream growth. (p. 67)

  A larger quantum of the incentives offered were absorbed mainly in the capital-intensive stage 2. In turn, this process contributed to increasing stage 2's relational power with stages 3 and 4

• Weak downstream linkages result directly from the firms' market power and pricing strategies. (p. 68)

  The weak downstream linkages are directly a result of the firms' market power, their strategies in the pricing of their main products as intermediate inputs to downstream activities, and lack of interest in beneficiation.

• Both firms are competitive without protection, though still supported, and industrial policy did not use its levers to push linkages. (p. 69)

  Both Iscor and Sasol have 'grown-up' in the sense of now being internationally competitive without trade protection. However, we should be careful not to overstate the case