Business Day Import Export (November 10 2021)

16

BusinessDay www.businessday.co.za Wednesday 10 November 2021

INSIGHTS

IMPORT/ EXPORT

YOUR TRADE SUCCESS. OUR AFRICAN NETWORK.

Terms and conditions apply. Authorised financial services and registered credit provider (NCRCP15).

The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06). GMS-19014 10/21

Sponsored content

Supply chain posers as consumer demand grows tlenecks, •leadBottimes and

inventory some of the problems faced, writes Lynette Dicey

S

upply chain disruptions are having a global impact with bottlenecks impacting manufacturing production and slowing down the pace of recovery in economies around the world.

It’s also influenced the earnings of corporate giants such as Apple and Volkswagen which have both been affected by a global shortage of semiconductor chips which impacted sales negatively.

The rapid spread of the Covid-19 pandemic in 2020 resulted in the shutdown of manufacturing facilities globally.

However, as lockdown restrictions have eased, consumer demand for products has grown exponentially as a result of pent-up demand and stimulus

Dr Greg Cline … global network. cheques in countries such as the US providing consumers with greater liquidity.

Despite the end of stimulus cheques in the US and tightened monetary policy in many other countries, consumer demand has not abated. In fact, demand for goods has recovered much more quickly than supply, given that the latter continues to be disrupted by Covid-19 outbreaks in many of the Asian countries where goods are manufactured, as well as a shortage of certain components and raw materials.

Dr Greg Cline, head of

corporate accounts at Investec for Business, says the situation is exacerbated by a dearth of container vessels on most major trading routes including between the US, China and SA which has resulted in freight rates rocketing. A global shortage of containers and truck drivers to transport containers once they have landed has not helped the situation.

Port constraints are not a uniquely South African challenge. According to Cline, a number of ports around the world have reported being congested in recent months as they battle a shortage of resources including staff to load and unload vessels. Port constraints means ship turnaround times are now much longer. In some cases shipping lines are choosing to avoid those ports suffering excessive congestion.

In SA the operations of local ports were badly affected in July by a cyberattack and civil unrest which impacted the Port of Durban.

The challenges posed by disrupted supply chains and logistics constraints is creating an even bigger headache for importers in the form of

ensuring adequate working capital for a longer period, according to Cline.

“Along with all-time high freight rates, importers often pay for goods before the vessel sails, pay customs VAT and, depending on the product, up to 45% customs duty on the products they import.

Combined, this represents a fairly significant portion of the landed product,” he explains.

In the normal scheme of events, adds Cline, they are out of pocket for as much as 120 days. “However, as a result of the disruptions to global supply chains it is often taking longer to land products which means they are incurring additional, unplanned interest costs on this money for even longer, making the import process inherently more expensive.”

The volatility of the rand leaves the importer at even greater risk unless they have hedged the currency, he says, adding that when margins are already tight this is an additional expense most importers can ill-afford.

“Global supply chains are complex which is why we work with partners who understand it end to end,” explains Cline. “We

have expanded our global network which has allowed us to gain access to additional capacity. Working with multiple shipping lines ensures an inherent flexibility and choice for when capacity and urgency are issues. There are always challenges around import codes and tariffs which is why it’s a good idea for importers to work with the right partners and clearing agents to alleviate some of the pressures.”

In response to the need for importers to factor in longer freight lead times, Cline says many of Investec’s import clients are carrying more inventory. In addition, clients have evolved their inventory tracking and forward planning intelligence to adapt to the situation.

“Ultimately, it’s coming down to incorporating data-led models. Some importers have elected to switch to sourcing products locally to mitigate the risks of importing,” he says.

Those importers with higher stock levels could well be looking to offload excess stock on Black Friday and over the festive season to ensure a more normal stock supply in the new year, he predicts.

Port inefficiencies increase costs, erode competitiveness The majority of SA’s imported and exported products enter or exit the country at one of its eight commercial ports.

A source of frustration for both importers and exporters is the fact that South African ports are notoriously congested as a result of ageing infrastructure and equipment, staffing shortages and frequent weather disruptions.

The World Bank ranks South African ports among the lowest in the world in terms of global container port performance.

According to its Container Port Performance Index 2020 SA’s ports are among the lowest ranked globally. Cape Town, which is listed as the topperforming port in SA, is ranked 347 out of a total of 351 ports.

Port constraints coupled with poor railway infrastructure means SA’s commodity producers have been unable to take full advantage of the recent commodity price boom.

Estimations are the opportunity cost to bulk commodity producers is in the region of R30bn for this year alone.

SA’s ports are so inefficient a

SA’S PORT CHARGES HAVE BEEN REGARDED AS EXCESSIVE COMPARED TO A GLOBAL INDUSTRY STANDARD

/123RF — ANEKOHO number of shipping lines have elected to simply bypass local ports. Despite this, Transnet National Ports Authority has proposed increasing port tariffs by up to 24% next year. Even prior to this latest proposed tariff increase, SA’s port charges have been regarded as excessive compared to a global industry standard.

“Transnet’s proposed tariff increase is not good news for traders,” says Ronnie van Rooyen, associate director for Deloitte’s Global Trade Advisory Practice for EMEA. “Port tariffs play a key role in the landed cost calculation of imported goods.”

The port of Durban, he says, is one of the most expensive ports in the world. “Raising port

tariffs should be a last resort as higher port tariffs risk turning shipping companies to other ports in Africa.”

RIPPLE EFFECT

Van Rooyen explains that ports play a key role in the employment of services directly related to the trade of goods including logistics, warehousing and transportation services. “If ports don’t operate efficiently and cost-effectively there is a ripple effect on both the trader and the party providing a service to the trader.”

He adds that local port inefficiencies increase the cost of imports and exports and ultimately undermine the competitiveness of the South African economy.

AfCFTA offers opportunities to reap economic benefits To date 38 countries in Africa have ratified the African Continental Free Trade Area (AfCFTA) agreement with 54 out of 55 countries signing the agreement. Eritrea is not a signatory.

The first shipment of goods under AFCFTA took place in early January this year and most signatories have now submitted their proposed rules of origin.

A Baker McKenzie report, compiled in collaboration with Oxford Economics titled AfCFTA’s US$3-trillion Opportunity found that Africa’s external imports account for more than half the total volume of imports while imports from other parts of Africa account for only 16% of total merchandise imports. Manufacturing GDP represents on average only 10% of GDP in Africa.

What this reveals, says Virusha Subban, partner and head of Indirect Tax at Baker McKenzie Johannesburg, is that limited production capabilities within Africa are currently being compensated for through foreign imports.

“This manufacturing deficit could ultimately be satisfied within the continent and enabled by AfCFTA. At a high level, AfCTFA is focused on stimulating growth, creating employment and diversifying economies across the African continent through the creation of a single African market for goods and services.”

Baker McKenzie’s report found that AfCFTA’s implementation offers unprecedented opportunities for Africa to reap economic and social benefits on the back of possible future improvements in transport infrastructure, reduction of red tape for crossborder dealings, renewed funding and improved liquidity.

“AfCFTA is providing an opportunity for African countries to diversify their economies, scale production capacity and widen the range of products made in Africa, in particular boosting the production of manufactured goods,” says Subban.

Virusha Subban … single market.

“Closer integration of neighbouring economies is one potential avenue for creating scale and competitiveness through domestic market enlargement, thereby promoting development through greater efficiency for both intra-regional trade and trade with nonAfrican nations.”

In the longer term, she says regional trade co-operation could potentially become a successful bridge for connecting the region’s wealthier and poorer nations, promoting the growth of value chains and laying the foundations for increased international exports, especially given existing strong trade ties with the EU and Asia.

The report underscores the importance of not only lowering tariff barriers, but also addressing nontariff barriers to intra-regional trade. Some of the most significant obstacles to AfCFTA are inadequate infrastructure, poor trade logistics, onerous regulatory requirements, volatile financial markets, regional conflict and complex and corrupt customs procedures. These, says Subban, can be even more detrimental to trade expansion that tariff measures.

“There is consensus that the vast infrastructure gap in Africa, including transport and utilities infrastructure, must be urgently addressed so as not to restrict increased trade integration.

Developing infrastructure is also key to addressing the

devastating economic impact of Covid-19,” says Subban.

The report points out that reliable transport infrastructure will be vital for businesses to be able to scale up production for regional export or to develop manufacturing bases. The continent will need to redouble efforts to ensure an adequate supply of water and electricity is available so that free trade across borders is possible.

“Investments in utility infrastructure will also incentivise foreign companies to set up production facilities on the continent,” says Subban, adding that post Covid-19 investors will be looking at countries where it is easy to do business and transport goods to other African market.

Under AfCFTA’s rule of origin, preferential trade is extended to goods that have either originated from or undergone substantial transformation in countries that have ratified the agreement.

“The process for identifying products that wholly originate in the AfCFTA is likely to be straightforward, particularly for agricultural products and resources from extractive industries. Products with more

complex supply chains, however, could require extensive analysis to determine whether they are ‘sufficiently worked or processed’ within AfCFTA and, if so, whether the whole product or the incremental value addition would be availed of preferential tariff rates,” she says.

SA is already benefiting from AfCFTA with regard to future growth and further trade expansion due to its existing strong connections across the continent and its already wellestablished manufacturing base, says Subban. Smaller economies such as Ghana and Ivory Coast are also benefiting as a result of existing favourable conditions such as open economies, good infrastructure and supportive business environments.

“The impact of Covid-19 has provided further impetus for African governments to overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives as well as capital flows,” says Subban, adding that domestic policies will also play a crucial role in alleviating some of the current trade barriers not related to tariffs.

/123RF — CHUYU

17

BusinessDay www.businessday.co.za Wednesday 10 November 2021

INSIGHTS: IMPORT/EXPORT

Export sector may help jumpstart recovery A thriving •import and

Challenges around export duty on scrap metal Government is currently evaluating the effect of the export tax on scrap metal which became effective in August this year in terms of the expected loss of income for informal workers, job losses and industry closures.

The export duty on ferrous and nonferrous waste and scrap metals was introduced primarily as a means of improving the availability of domestic scrap and to facilitate a 20% to 30% export price discount for South African consumers, explains Virusha Subban, partner and head of Indirect Tax at Baker McKenzie Johannesburg.

The South African Revenue Service says the objective of export duty on scrap metal is to provide foundries and mills

with better access to higher quality and more affordable scrap metals in the local market.

“In turn, this will result in the mills and foundries becoming more competitive cost-wise, while also attracting investments, creating employment and supporting industrialisation. It will also ease the pressure brought upon by unfair trade practices within the domestic metals industry,” says Subban.

“The export on scrap metals means certain metals are subject to a specific duty based on the average value of exports for each category of scrap metals over a certain period of time. SA is a member of the World Trade Organisation (WTO) and as such, it can legally make use of export taxes on

raw materials to promote local businesses and increase international competitiveness,” she says.

Government has justified the tax arguing that it is a way to grow local beneficiation and aid downstream industries. As Subban points out, it’s also a way to raise tax revenue streams.

NEW FRAMEWORK

“It’s no coincidence the proposed amendments to the customs legislation in SA include a new framework for the levying of export taxes,” says Subban, adding that using export taxes as a development policy will most likely gain momentum in developing countries going forward.

“From a legal standpoint,

resource-rich countries intending to use export restrictions as a policy tool will have to ensure their WTO commitments allow them to do so,” she says.

SA’s scrap metal export tax applies to all countries except those with trade agreement exemptions. Under the current SADC-EU Economic Partnership Agreement, scrap metal exports to EU member countries on goods destined for the EU can only be applied for a limited period of years, with a predetermined level of exports being exempted from export duty, including scrap metals.

This year government also approved a tax on SA’s exported chrome. The ferrochrome ore industry, reveals Subban, has been severely threatened in

recent years, primarily due to electricity tariff increases for heavy use industries which, combined with the unreliable supply of electricity in SA, has crippled the industry to such an extent that a reported 40% of the country’s ferrochrome mines have been unable to continue production.

“Stakeholders have suggested a special electricity tariff would be a better way to support the ailing industry, arguing that the export tax will not provide much benefit if electricity supply and costs to the industry are not addressed,” she says. “However, there is a school of thought that given the challenges chrome ore producers face, they won’t be able to sustain themselves, even after tax relief and the export tax

won’t only negatively affect exports but also the downstream industry.”

SA is one of the world’s largest producers of ferrochrome and the industry could have a vital role to play in the country’s pandemic recovery if its challenges can be successfully addressed, maintains Subban.

MARKET SHARE

“Currently, the country exports 84% of ferrochrome to China.

Turkey and Zimbabwe produce smaller amounts of ferrochrome. The concern is that an export tax will mean other countries will be able to offer ferrochrome at cheaper prices than SA, with the country losing significant market share in the process,” she says.

export industry is positive for the local economy

S

A’s export sector could be a catalyst for the country’s economic recovery and help to address growing unemployment, according to Justin Milo, executive head of Trade at Standard Bank South Africa.

The IMF predicts that global growth will increase by 4.4% in 2022, while global trade is anticipated to grow by 6.5% over the same period. These are positive leading indicators of global economic activity with a knock-on positive impact on SA exports, says Milo.

SA has traditionally imported more than it exported, resulting in a trade deficit. However, thanks to a commodity price boom, SA has been recording a trade surplus for more than a year with the country’s exports outpacing imports.

“At the end of August 2021, SA’s trade surplus was R332bn after significant growth in exports,” says Milo adding that exports had grown by 41% year on year on a year-to-date basis by the end of August following increased commodity prices

THANKS TO A COMMODITY PRICE BOOM, SA HAS BEEN RECORDING A TRADE SURPLUS FOR MORE THAN A YEAR WITH EXPORTS OUTPACING IMPORTS and growth in the economies of SA’s trading partners which is pulling through the demand for its exports.

“Key drivers of the trade surplus include mining outputs such as precious metals, iron ore and manganese, manufactured goods such as machinery, equipment and motor vehicles and agricultural commodities such as citrus, maize, apples and grapes,” he explains. “These export flows have been channelled to our key trading partners in Asia, including SA’s largest trading partner, China, as well as Japan and India; the US; Europe, including Germany, UK and the Netherlands; and Africa, including Namibia, Botswana and Mozambique.”

Although the expectation is that SA will continue to have a trade surplus, the increase in oil prices means the trade surplus is likely to start decreasing, reveals Milo.

Supply constraints, higher than expected demand for goods, container shortages and insufficient shipping capacity have resulted in a global freight crisis which has seen shipping transport costs rise significantly in the past year. These supply chain disruptions have encouraged local corporates to increase their domestic and regional procurement to mitigate their supply chain risks — this presents a growth opportunity for local businesses, the South African export sector and regional trading partners.

Msawenkosi Hlanti, executive head of Trade Sales, SA for Standard Bank, says the crisis is an opportunity to grow the local manufacturing and

Justin Milo … deep knowledge.

SME sector. “This has farreaching positive impacts by growing the number of available jobs, growing the economy and growing future exports.”

Once global supply chain disruptions have eased and, locally, port constraints have been addressed, Hlanti expects both imports and exports may increase.

A thriving import and export industry is positive for the local economy, says Milo. “Imports create a significant amount of value locally while increased demand for exported goods will help to develop and grow our local manufacturing sector and industrial base.”

Standard Bank is well placed to assist corporates to navigate these increased trade opportunities by offering export driven solutions to mitigate risk and assist in accelerating liquidity for exporters under any preferred form of transacting, including letters of credit, open account arrangements or under documentary collections, adds Hlanti.

A letter of credit is an undertaking issued by a bank on behalf of the importer to make payment to the exporter, based on certain terms and conditions being met. What the letter of credit provides for the exporter is payment certainty.

“As an African and truly South African bank, Standard Bank has a vested interest in supporting the growth of local industries, SMEs in particular,” says Hlanti. “We offer a variety of bespoke working capital and supply chain finance solutions to assist clients with accessing affordable funding based on local and cross-border transactions.”

An example of these solutions, he reveals, is the bank’s supplier financing solution, which allows suppliers to be able to receive early payment at preferential rates against invoices raised on a buyer. The solution, which is delivered on a fully automated basis, ensures a streamlined and timely processing of settlements and invoices.

The bank is also able to help exporters mitigate key risks in the export process including payment and exchange rate risk and providing working capital to meet their liquidity needs.

“Standard Bank’s deep knowledge of the continent, extensive correspondent banking network and innovative solutions entrenches it as the ‘go-to’ bank for trade finance,” says Milo.

KEY DRIVERS OF THE TRADE SURPLUS INCLUDE MINING OUTPUTS, MANUFACTURED GOODS AND MOTOR VEHICLES

YOUR TRADE SUCCESS. OUR AFRICAN NETWORK. Corporate and Investment Banking

If your aim is to access African trade markets, your business needs to connect to the right experts.

Our extensive footprint across the continent will connect you to a wide array of economies and markets.

That’s why we are the African bank that businesses and other banks trust for trade solutions across Africa.

With our combination of expert advice and digitised solutions, your business will realise all its potential and priorities making it all It Can Be.

Terms and conditions apply. The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06).

Authorised financial services and registered credit provider (NCRCP15).

It Can Be is a registered trademark of The Standard Bank of South Africa Limited. GMS-19014 09/21