There is no sign of progress in talks between steel giant Ispat Iscor and the government over a ”developmental pricing” model aimed at helping local industry to capitalise on South Africa’s abundance of cheaply accessible iron ore.
And as the combined effects of the strong rand and high input costs continue to hurt margins in local mining and manufacturing, there is little agreement over what ”developmental pricing” means.
Steel is crucial to the engineering that makes sub-surface mining possible, and to industries ranging from consumer appliances to cars and construction. But despite low production costs, local buyers are mostly required to pay as much for local steel as they would if they imported it.
Ispat Iscor bases its schedule of prices on a regularly recalculated import-parity price, which includes notional international shipment costs and currency fluctuations that have no bearing on the real cost of production and local transport.
Critics say the company, now controlled by multinational resources group LNM, must be held to an agreement with the Department of Trade and Industry to introduce a pricing model in line with the government’s economic strategy.
The department sees affordable primary steel as one foundation of a labour-intensive manufacturing sector. It reached an in-principle agreement with LNM executives earlier this year to introduce developmental pricing as a condition of allowing Ispat Iscor to merge with the group.
However, no firm agreement exists, and even the basis for an agreement appears in dispute.
The trade and industry department’s Nimrod Zalk said developmental pricing implied a model that will ”enable us to exploit South Africa’s competitive advantage in resource-based intermediate products like steel, to build a competitive downstream manufacturing sector”.
He declined to elaborate, saying that the department hoped to reach consensus with Ispat Iscor over a model that could be voluntarily implemented.
So far the company has shown little sign of making major concessions, and some trade and industry department officials admit privately that there is frustration over claims that the discounts it gives car and appliance manufacturers represent a developmental approach.
Ispat Iscor’s corporate affairs executive Phaldie Kalam said ”talks with the government are aimed at providing further support for the growth and development of the domestic downstream manufacturing industry, which is focused predominantly on secondary steel exports”.
”Our price base will remain international parity,” said Kalam. ”However, we intend developing a sustainable and competitive pricing model for the downstream industry in accordance with World Trade Organisation principles and mutually beneficial for all parties.”
This suggests the company intends offering little relief to non-exporting local steel consumers
Simon Roberts, a Wits University economist who is helping Durban Roodepoort Deep and Harmony Gold compile allegations of anti-competitive behaviour against Ispat Iscor for the Competition Tribunal, described these arguments as ”an attempt to privatise industrial policy”.
However, the government and competition authorities have limited leverage over the company, according to a paper jointly authored by Roberts and Zalk in their personal capacities.
Massive economies of scale mean steel is to some extent a natural monopoly, and breaking Ispat Iscor into competing units is unlikely to be feasible. Nor will more aggressive trade liberalisation have much effect, the paper argues, because transport costs erode the competitiveness of imports even when tariff barriers are reduced.
According to Roberts and Zalk this leaves only price regulation, of the kind imposed on other monopolies such as electricity transmission, as a possible lever of control. But they concede that moves toward statutory price control are likely to have a negative effect on investor perceptions in an industry that sorely needs new capital.