Steel giant Mittal came under pressure from academia and the government recently in its continuing battle over steel prices. Mittal reacted with legal and tactical aggression in the case of the former and with a mild but expected sulk to the latter.
The battle is with Harmony and Durban Roodepoort Deep, purporting to be acting on behalf of a large portion of the South African economy, at the Competition Tribunal.
In the past two hearings, the steel giant listened to the opposing side argue for regulation of steel pricing as well as claims that Mittal may have massaged its figures to create an impression of operating on the very margins of profitability. Outside of the hearings, it had to contend with the government’s decision to cut the 5% import tariff on a range of primary carbon and stainless steel products.
Last week, the tribunal heard Zaveren Rustomjee, a former Department of Trade and Industry director general and now an independent consultant, who suggested that if competition authorities could not regulate steel prices, a special body should be established for this purpose.
Rustomjee, testifying in his personal capacity, painted a picture of how the government has generously supported key industries to exploit South African competitive advantage in resources and create world- class suppliers of input-like steel and chemicals, only to see these fail to benefit the downstream economy.
Mittal, for example, benefited from the general export incentive scheme. This cost R21-billion between 1992 and 1997. Mittal’s predecessor, Iscor, is reported to have received R875-million between 1992 and 1996 under this scheme. The giant also bene-fited from accelerated depreciation tax incentives and a R300-million investment for a coke plant in Newcastle in KwaZulu-Natal.
The idea of a regulator is unlikely to find favour in many quarters. Although the principle that any product supplied by one large player, or a handful of powerful ones, should be regulated is generally accepted, regulation has its own limitations. Mandla Maleka, senior economist at Eskom treasury, is wary of a situation in which the “economy is run by a conglomerate of regulators” as private-sector players who have price complaints end up having their disputes resolved through setting up a regulator.
At this week’s hearings, Harmony brought forward Harvey Weiner, an accounting professor at Wits University. Weiner elegantly imploded the plea of poverty presented by Mittal’s accountants. Through reports filed by Rudolph Torlage, a Mittal accountant, and Mike Walker, an independent accountant, Mittal sought to show that its return on equity was below its weighted average cost of capital, which represents the cost of capital deployed. This cannot be sustained indefinitely and can lead to bankruptcy.
Weiner showed that Torlage and Walker’s claim that the company did not have adequate provision for depreciation was untrue. He argued that the company depreciated its assets much faster than required. Over the five-year period between 2000 and 2005, capital expenditure exceeded depreciation by an average R247-million. This suggests that the company was adequately maintaining its equipment, especially in its heart at Vanderbijl Park, since it did not expect to move its “location because of technology”.
Mittal lawyer Gert Pretorius attempted to unsettle Weiner with aggressive interrogation of methodology, including a question on rudimentary accounting.
To rest his case, Weiner asked why a company that is teetering on the verge of unprofitability has “a densely traded stock with sustained investor interest” and has outperformed the market [JSE] and its peers comfortably over the past five years.
Another blow for Mittal came from Parliament on Wednesday, when Trade and Industry Minister Mandisa Mphahlwa announced the scrapping of the 5% import tariff on certain steel products.
Tami Didiza, general manager for corporate affairs at Mittal, noted that the giant was disappointed with the move. He pointed out that, at 5%, it was already the lowest in the developing world. More importantly, he noted that the duty served as a deterrent to dumping.
He then said that since Mittal is no longer utilising import parity pricing, this will have no major effect on its market and performance.