Harmony CEO Bernard Swanepoel has emerged as something of a consumer champion after his recent testimony against steel producer Mittal at the Competition Tribunal.
“I’ve been flooded with letters of support from smaller businesses that cannot afford to pick a fight with Mittal because they are too intimidated,” said Swanepoel.
Harmony and fellow gold producer Durban Deep have accused Mittal of excessive pricing for charging local steel consumers the equivalent of what it would cost to import steel — known as import parity pricing (IPP). This is the first case alleging excessive pricing ever brought before the tribunal. Mittal is accused of charging local customers what it would cost to import steel after adding notional shipping, wharfage, inland transport, a 5% import duty and a further 5% “hassle” fee. Because there is no effective competition, Mittal can get away with this pricing structure, David Unterhalter, representing the two mining groups, told the tribunal last week.
This week, the government stepped into the fray, saying it may consider withholding incentives to companies involved in IPP. According to Business Day, the government may reconsider extending benefits such as the strategic industrial projects incentive — which offers tax breaks to companies investing at least R50million in qualifying projects to those engaging in IPP.
Swanepoel said Harmony and Durban Deep do not buy sufficient quantities of steel to qualify for special discounts, and Mittal’s strategy is to keep customer groups fragmented. “The fact that they offer special deals to some customers indicates they can accept lower prices for their steel,” he said.
Steel accounts for 13% of Harmony’s procurement costs, which amounted to about R400million between 2002 and last year. Domestic steel prices increased at several times the inflation rate over this period. Had steel prices increased at the inflation rate of about 6% a year, Harmony would have saved roughly R100million in steel charges over the four-year period — equivalent to R1,7billion over the average life of its mines. This is enough to sink a new shaft or develop a new mine, said Swanepoel.
“Obviously we want to bring down the cost of steel for ourselves, but it would be a huge benefit to the economy if all steel consumers were given some relief,” he said.
Mittal’s pricing practices were subject to forensic examination by lawyers representing the mining groups. They argued that smaller local customers are often charged above the import parity price. Only large customers such as automobile manufacturers and packaging producers were entitled to substantial discounts. Automobile manufacturers have some capacity to bypass Mittal through their global supplier networks, and packaging companies are able to switch to alternative materials such as plastic. It was argued that Mittal keeps them as customers by offering special discounts, but the same discounts are not available to those who buy in smaller quantities and have no alternative sources of supply.
Harmony and Durban Deep allege that there is no effective competition in the domestic steel sector. Highveld Steel poses “no significant competitive challenge to Mittal” said Unterhalter, and follows Mittal’s price increases in a predictable way.
Unterhalter then produced evidence showing Mittal’s average domestic prices were between 46% and 76% higher than similar products on the export markets. There were also wide variances in net realised prices. “If one looks at the difference between local net realised prices and export net realised prices, year by year, one sees very considerable differences. In 2002, that difference was of the order of 53%, 2003 of the order of 83%, 2004, 66% and in 2005 it is 50%. So, one sees very, very significant differences between these prices, the average export price and the price that is charged domestically,” he told the tribunal.
In a similar case, gas cylinder and outdoor equipment manufacturer Cadac has claimed before the Competition Commission that Mittal is in breach of the Competition Act because it engages in price discrimination by offering different prices to different customers. Cadac’s production manager, Miloch Despotovich, said overseas customers are able to land Mittal steel at 35% below what it would cost local customers who drive down to Vanderbijlpark to pick it up themselves. This case is likely to be heard in June.
“The system of pricing steel in South Africa encourages exports; it does not encourage local production,” said Despotovich.
Large-volume domestic customers account for about a third of Mittal’s domestic sales, a further 15% going to those involved in the secondary exports of steel, which qualify for a subsidy. A sizable quantity of Mittal’s domestic product attracts the top price, which is import parity pricing or above, the tribunal heard.
Evidence was produced at the tribunal showing Mittal was the world’s third-lowest cost producer of steel in 2004. This was not surprising, said Unterhalter. Mittal’s Vanderbijlpark plant, south of Johannesburg, is situated at the heart of the country’s industrial economy and has access to cheap iron ore, coal and electricity. Under an agreement struck at the time of the unbundling of Kumba Resources (the mining business formerly part of Iscor/Mittal), it secures iron ore at cost plus 3%. Mittal also has beneficial deals on the purchase of zinc and its labour costs are low relative to many other countries. The only raw-material input cost where international prices apply to any degree is coking coal, much of which it imports.
“So, one asks oneself, if you are the cheapest, one of the very cheapest producers in the world and you are located, as Vanderbijlpark is, close to its central markets with these cheap inputs, how is it that local customers are being charged 40, 50, 60, 70, 80 percent more than customers located elsewhere?” asked Unterhalter.
Mittal’s legal counsel, Chris Loxton, argued that Mittal was obliged to export because of its excess production capacity, and had one of the highest percentage of exports to internal sales in the world. These exports cover its variable costs, not its total costs. If Mittal were to sell steel at export prices only, “it would mean that in the long term Mittal would not be a viable concern”.