Mittal's metal is no steal
It is up to 40% cheaper to buy South African-made steel in foreign countries than it is in the local market, even after shipping, wharfage and other costs have been paid.
That’s because Mittal Steel (previously Iscor) prices its goods in the domestic market as if they were imported—known as import parity pricing. Steel sold locally is charged at international prices, plus notional shipping, wharfage and other charges, and a 5% import tariff.
Mittal Steel produces most of the flat-steel products sold domestically and enjoys a near natural monopoly because of the high cost of shipping steel from other export markets to South Africa.
It also enjoys the benefits of cheap power and coal and relatively low labour costs.
This places Mittal South Africa among the lowest-cost producers in the world, and a substantial profit generator for the global steel producer. There is also talk that it would be keen to buy its only competitor in flat steel products, Highveld Steel, should Anglo American decide to sell its majority stake.
Harmony and DRD Gold have joined forces to challenge Mittal’s import-parity-pricing structure at the Competition Tribunal after a 2003 ruling by the Competition Commission that import-parity pricing was justified.
Harmony says it was slapped with a 24% increase in steel prices in the 2004 financial year at a time when inflation was just 9%. Prices went up a further 4,5% in the first half of the 2005 financial year, followed by a 6,3% decrease in March this year. “This price decrease seems to have been as a result of our initiatives at the Competition Commission, as well as pressure from the Department of Trade and Industry,” says Ferdi Dippenaar, executive director at Harmony.
Lower international demand for steel seems to have contributed to the price decrease. Earlier this year, Mittal announced that it would cut global steel production by one million tons in the third quarter because of softer world demand.
Dippenaar adds that steel accounted for 12% of Harmony’s cost inputs two years ago, though the figure has since fallen to about 9%. “It’s still well above where it should be. We’re challenging Mittal’s pricing on grounds of principle. Of course we want to lower our steel costs, but there are broader issues at stake. We think these price increases in recent years are way above what a reasonable producer should charge.”
Harmony says it is looking at alternatives to locally made steel. “Now that China has become a net exporter of steel, we will look very seriously at buying from them,” says Dippenaar.
It’s not just big business that suffers, adds Dippenaar. “Imagine what impact the steel price has on informal housing, and on small suppliers for whom steel is a major input.”
A study last year by Wits University economist Simon Roberts and Nimrod Zalk of the Department of Trade and Industry found that South Africa exports 44% of the 6,6-million tonnes of steel produced annually. Imports account for less than 5% of the total steel sold locally. The study found that steel accounts for between 24% and 43% of input costs in downstream industries, and has a “pervasive effect” on the competitiveness of downstream manufacturers.
Last year’s merger of Iscor and Mittal, the world’s largest steel producer, was approved by the competition authorities after the Department of Trade and Industry said it would only approve the merger if Mittal agreed to a more advantageous pricing arrangement for domestic steel producers. Zalk says discussions between Mittal and the department are ongoing. “The Department of Trade and Industry is looking at the issue of import parity pricing generally, not just as it relates to steel. Though there is a theoretical case for regulating prices in industries that engage in import parity pricing, this is not the route we are taking. Our preferred approach is to focus on anti-competitive behaviour and establish what would be the outcomes if competition were present in these industries.”
This may require a change to the Competition Act, allowing, in extreme cases, for the break-up of a monopoly. Another option is to tighten trade policy by lowering or scrapping import tariffs. Zalk says it will present its recommendations to the Cabinet. The state could also apply pricing pressure on local monopolies through state-owned enterprises such as Eskom and Spoornet. South Africa’s electricity is among the cheapest in the world, and a major competitive advantage for local manufacturers.
In June last year, Cadac asked the Competition Tribunal to appoint independent auditors to investigate Iscor’s relationship with steel merchants Trident and Macsteel to establish why local consumers were forced to pay 35% more than steel consumers elsewhere in the world.
Mittal offers discounts to selected customers, such as vehicle manufacturers, but other consumers say they are left out of the loop.
Mittal’s annual reports show that exports accounted for nearly 40% of its long-products output last year. Roberts says domestic consumption of steel would be higher if prices were more competitive. Mittal achieved a return on assets of 52% at its Vanderbijlpark plant, and 16% and 58% respectively from Saldanha and long products (this assumes a 10% increase in assets for the 2004 financial year).
In response to questions e-mailed by the Mail & Guardian to Mittal on its import-parity pricing practices, the company said it did not want to pre-empt negotiations with the Department of Trade and Industry, which were at an advanced stage.