Earlier this year Iscor used the strong rand as an excuse for mass retrenchments of 1000 workers. Sadly, the Competitions Commission has made a negative recommendation to the Competitions Commission tribunal by allowing LNM holdings to increase its shareholding capital to 55.7%. Furthermore, the commission approved Import Parity Pricing (IPP) charged by Iscor.
Iscor said that it was retrenching because of a strong rand. If one were to follow this logic, then Iscor should explain why it did not employ new workers when the rand was weak. Even if monetary easing does not achieve the desired results in the short term, it will stimulate domestic demand and generate economic growth. Iscor must do proper planning and not react negatively to the rand. The effects of a strong rand are felt over a long period, not a short one.
Iscor misunderstands how to handle the rand issue, as do many economists, who argue that the rand should find its own level, subject to market forces and international standards.
This is naí¯ve and wrong because it is difficult to time the market. The market is wholly controlled by speculators who will push the rand up and down until it loses its value. They will manipulate it for their own selfish ends. There is no guarantee that the currency will be stable.
There should be an element of intervention because the market is unpredictable. This is what we must achieve, but we recognise that things are not that simple.
The strength of the rand reflects the weakness of the dollar. The US is worried about its jobless recovery and sees the devaluation of the dollar as a means to stimulate exports industry and create jobs. This US approach has negative consequences for other trading countries, particularly South Africa , which is exporting similar products in the metal and mining industries. This will pose a burden on developing countries. It is anticipated that the dollar is likely to improve because of sound US economic fundamentals. This could plough good returns back into the economy.
The timing of this proposed cut in employment is poor because everyone agrees that employment has to be South Africa ‘s number one priority. If we scratch below the surface of the decision, we can see there is no reason for retrenchments, because unemployment and poverty are increasing.
Employment at the company has fallen from 44 000 in the 1980s to 11000 in 2004. The company’s approach is narrow and does not address South Africa ‘s woes of unemployment and poverty.
The United Nations Development Programme (UNDP) report reveals that 21,9 million people – 48,5% of the population still live in dire poverty. The gulf between the poorest and the richest South Africans is still widening.
Lavish pay of directors
Furthermore, if Iscor is really serious about the rand issue and cost implications, they must target the lavish executive pay of managers and directors. The Iscor CEO is topping the salary league with a staggering pay rise of R8 million per annum.
If we compare his salary with the ordinary workers who are getting R1900 per month, it shows an expanding wage disparity. His salary can pay 350 workers per year.
The recent study of Cape Town-based Labour Research Service (LRS) revealed that the average pay for bosses is 60 times that of the average pay of a production worker. The wage gap between directors and workers is widening. Company directors have received far higher pay increases than workers, despite sluggish company performances. The LRS report continued to reveal that over the past ten years directors’ fees have increased at an average rate of 29%, compared with 49% increase among non-executive directors and a mere 6,5% average increase among workers.
Production costs
Iscor’s production costs declined by 3,3% in rand terms, and declined significantly in US dollar terms because of the strength of the rand.
If we had to split the 3,3% production cost further, we can observe that the bulk of the costs are distribution and logistical costs more especially externally in dollar terms. Most of the internal costs are covered through Import Parity Pricing (IPP) (the practice of setting the price of goods as if you were buying them overseas and importing them into this country). In reality, there is no issue on labour costs.
Competition Commission
The Competition Commission has erred by unconditionally recommending to the Competition tribunal that LNM holdings be allowed to increase its shareholding capital at Iscor above 50% and approve Import Parity Pricing (IPP) charged by Iscor. It is our firm view that the commission has an insipid understanding of industry issues and is subsequently making a comedy of errors that have serious ramifications to workers and the economy.
The commission seems to be sustaining the status quo and not helping us in the developmental project. The commission has deliberately undermined the fact that Iscor’s steel division is to retrench 1000 workers in its attempt to pave the way for the LNM takeover. The two companies have been directly involved in the trimming of over 10 000 workers in the past five years.
The commission’s argument that the retrenchments are not connected to the merger is untrue. This is not a merger where a new company is coming in to Iscor. LNM Holdings are already the major shareholder and are already responsible for the retrenchments. The only difference now is that they will have a completely free hand to do what they want with workers and restructure the company as they wish.
As part of the acquisition, local human resources will be compromised. This means that foreign expatriates will be preferred to run the company based on the strategic plans with a fixed mandate.
Sadly, procurement will be externalised forcing the primary company to use cheaper inputs in the production process. This will further undermine the local content and destroy companies in the downstream industries. There will be too much emphasis on export growth, at the expense of the domestic market. The takeover will not achieve a balance between the needs of the upstream producers as well as the strategic role in the industry and the employment creation potential of downstream sectors.
The commission has failed to understand a simple economic logic that the takeover will lead to intra-firm pricing of steel, whereby the company will set and determine their own prices because they will own the product and services in the market.
There will be more centralisation and monopoly thus undermining the national interest of South Africa . We believe that the takeover is erroneous because it does not create new employment. The acquisition further undermines the government in its attempts to create jobs and new investments in the country. The merger is not new investment. All what they want to achieve is to make a killing on profits. I n this regard, the takeover will harm the broader economy of South Africa .
Import Parity Pricing
Furthermore, the recent rationale by the commission to approve IPP charged by Iscor is not only repulsive but also short-sighted.
As a result of IPP, Iscor is charging double the price of steel to the local companies and consequently stifles the local economy and destroys jobs in the entire metal and mining industry industries. The IPP prevents the entry of the new companies in the downstream sector of the engineering, thus preventing the creation of new jobs in the local economy.
Recently, the South African gas cylinder manufacturer, Cadac, closed all its operations in South Africa alleging that Iscor has harmed its business by excessive steel pricing. The gold mining companies, Durban Roodepoort Deep (DRD) and Harmony made similar complaints to the Competition Commission.
There is a danger that this could have a negative impact on the economic growth as many companies are dismissing workers to catch up with Iscor’s pricing mechanism. Applying IPP is destroying jobs and local companies.
In conclusion, the intricacies of the strong rand, acquisition and its impact on the economy cannot be resolved thorough manipulation of the facts and political chicanery but through mature leadership and the ability of employers to consider long term commitments to jobs. It is not fair to expect workers, most of whom are poor and many of whom are trapped in dire poverty, to take the burden of unemployment.
Dumisa Ntuli is Numsa’s information officer.