South Africa’s iron and steel giant’s pricing practices will again come under fire when the Competition Tribunal hears complaints that it is hurting South African industry by charging international prices for its steel.
The issue returned to the spotlight this week when Harmony Gold Mining and Durban Roodepoort Deep (DRD) called a media briefing to outline the case they intend presenting to the tribunal. It includes complaints that Iscor is unjustifiably charging local consumers international prices, and that it has granted export rebates to customers in a discriminatory way.
Harmony also says price concessions Iscor has granted to certain industries, including the automobile manufacturing industry, were forced on it and were not the fruit of benevolence.
Also highlighting the pricing controversy was a mission by a Department of Trade and Industry (DTI) team to the Anglo Dutch group LNM, the world’s second-largest steel producer, which holds 49% of Iscor and is seeking to take it over. The takeover requires the approval of the South African competition authorities. On Thursday LNM announced it had no immediate intention to make the offer.
Former trade and industry minister Alec Erwin wrote to the Competition Commission last month suggesting Iscor would have to implement a “benign” pricing policy if it wanted the takeover to be approved by the government. This week the DTI and LNM are reported to have reached agreement on the need to develop a “sustainable and competitive” pricing model for the local steel industry. Iscor implemented a 21% increase in flat steel prices in April and May.
Presenting his company results earlier this year, Anglo American CEO Tony Trahar, speaking to the Mail & Guardian, described the increase as “unacceptable”.
The National Union of Metalworkers of South Africa noted that “import parity pricing was consistently raised as an impediment to the employment-creating potential of downstream sectors within the metals and engineering industry”.
Harmony and other affected companies first approached the Competition Commission, which found no evidence of excessive charging or abuse of domi-nance. It found that “Iscor’s prices were comparable to prices of competing products available locally, as well as to prices charged in other countries’ domestic markets.”
On granting allegedly discriminatory incentives, it found “exports and local sales were not competing in the same geographic market, and that none of the customers that received the different rebates were actually competitors”. Since rebates were given to specific industries or products, all customers in the category would benefit. Iscor grants rebates to companies that beneficiate steel and export it.
The commission, which conducts a preliminary investigation, refused to refer the matter to the Competition Tribunal. However, the complainants intend doing so themselves.
Defending Iscor’s pricing policy, Phaldie Kalam, head of corporate affairs at the steel giant, said that although Iscor priced its steel according to the international market on an import parity basis, it took the lowest prevailing prices, usually those of the Black Sea region. “Our prices are lower than international prices,” he said.
Simon Roberts, a Wits University economist and member of the team that assembled the case for Harmony and DRD, insisted that import parity pricing did not apply in instances where a country had a surplus and a comparative advantage in a commodity, as South Africa did in the case of steel. South Africa has the best grade iron ore in the world, low energy costs in both electricity and coal, and relatively cheap labour compared to areas such as Japan and Korea.
Thus the opportunity cost, or the amount Iscor sacrificed in selling an extra ton of steel locally, was what it would get if it exported the ton. This was the reason the company should charge the export, not import, parity price, Roberts said. He drew a parallel with maize in Southern Africa. While the region normally had a maize surplus, drought had caused shortages in recent years. In such conditions, prices rose towards import parity.
Roberts argued that what Iscor was essentially doing was to “see how far they can push the price until customers consider importing”. This led to a situation where an East Rand producer sourced steel from nearby Vanderbiljpark and was charged a price that included shipping and other import costs. Roberts also said Iscor pricing caused anomalies in industry and, ultimately, fed through to consumers and the government.
He cited gas cylinder manufacturer Cadac, which used to manufacture cylinders for the local market for itself and other gas suppliers but now imported them from Portugal — in some instances, made from Iscor steel.
Also using Iscor’s flat steel were manufacturers of corrugated iron roofing. Higher steel prices had led to an increase in the cost of corrugated iron and other applications in the construction industry, including low-cost housing. This, in turn, had forced the government to raise housing subsidies.
Kalam said a linear computation of prices was “simplistic”. “Our pricing [principle] is the same as that applied to petroleum and gold,” he said.
Welcoming the DTI-LNM agreement to review the local pricing model, Kalam released a statement emphasising that the review was primarily aimed at the beneficiation industry and nurturing South Africa’s secondary steel export market, not mature manufacturing and mining.
“The company’s long-standing pricing policy, which is based on international parity pricing, will continue to be the basis for establishing domestic steel prices,” he added. The uncertainty over pricing has harmed Iscor’s shares.
Kalam said Iscor continually reviewed its prices in consultation with customers, taking industry-specific circumstances into account. Its export rebate initiative had resulted in savings for the downstream industries of R1,2-billion over the past three years. “That is our contribution to making the downstream industry internationally competitive,” he said.
Iscor has in place agreements with the small appliances industry and car manufacturers. However, the former accounts for 1% of its sales, and the latter 7%. In the case of vehicle-makers, a deal was struck by bargaining and leveraging global strength.
When Iscor sought to raise prices by up to 45%, car manufacturers threatened that instead of buying steel from it, they would import complete vehicles from other assembly sites. Eighteen months of negotiations led to a three-year agreement providing a price-increase formula based on the exchange rate and the producer price index, each with a 50% weighting. “That gives the manufacturers certainty,” Roberts said.
The takeover of Iscor is part of a consolidation that has taken place over the past 18 months.
According to Kalam, Iscor produces four million tons a year, compared to a world output of 800-million tons. The market is currently in a three-year bull run, widely attributed to demand from China.