The first round in the month-long battle between Harmony and Mittal at the Competition Tribunal came to an end this week, with Harmony probably feeling it had made a moral and economic case, while Mittal may have been left feeling bruised, but standing firm.
Most damaging to Mittal will be revelations that its behaviour as a dominant player is not confined to how it treats its customers, but extends to the government and competition authorities. Two claims in particular heard over the past few days stand out. The first stems from a meeting with the Department of Trade and Industry last November, attended by the acting Director General, Tshediso Matona. Mittal claims that the government ignored a proposal for a new pricing model and kept insisting that the company move away from import-parity pricing to export-parity pricing, which the steel giant claims threatened its profitability.
Evidence this week suggested that Mittal was not completely open in discussions and failed to timeously provide additional information required by the department. The company also said that its proposed pricing model did not make a difference to actual price. Mittal director of marketing Charles Dedman then told the tribunal that the company grew ”frustrated” and ”unilaterally” implemented a new pricing model.
The second and probably more damaging claim was that Mittal manipulated the figures it submitted to the tribunal to make its returns look less attractive. Earlier in the hearings, a Wits University accounting professor demonstrated how Mittal had distorted its depreciation calculation.
Mittal brought out Michael Walker of CRA International, a United States-based economics consultancy. Walker told the tribunal that Mittal’s pricing was not abusive and that certain customers would be worse off if Mittal closed down.
At the heart of the issue is Mittal’s practice of selling steel at an import-parity price. This is when a company charges local customers a price that includes shipping costs and import duties. So, for example, a Merrill Lynch report reveals that on March 17 the price of maize on the international market was R645 a ton. The import-parity price at Cape Town harbour was 33% higher, at R973 a ton. If Mittal was the sole and dominant supplier of maize, it would charge maize from the Highveld at the latter price.
Harmony claims that this practice pushed up its cost to a point where it had to walk away from an opportunity to commission a R1,7-billion mine.
Merrill Lynch analyst Tasnim Benn estimates that local steel prices are 10% to 25% higher than international prices, with South Africa hampered by the size of its market, high capital costs in steel manufacturing and distance from international markets. The best option that Benn sees for the government is to use a range of existing incentives as a bargaining chip to push prices lower.
Whether that will be enough to move a giant that acts unilaterally out of frustration remains to be seen. A bully with a bloody nose is still a bully.
The big three
Monopoly pricing is the subject of a recent Merrill Lynch report, which, apart from the steel industry, looks at Sasol’s polymers and the cement and telecoms sectors.
The report identifies three reasons why South Africa is saddled with monopoly prices. The first is the government’s historical role as a supplier of water, electricity and basic telephony. When these are privatised in preparation for the introduction of competition, prices tend to shoot up.
The second is that the South African market is too small to sustain competition in industries that require large economies of scale — the steel industry being a case in point.
Finally, economic growth has been faster than expected, pushing demand above supply. Once supply constraints in industries, such as cement, are overcome, prices may come down.
The Merrill Lynch report argues that if the polymer sector is to be investigated, it will be the last. This is because the range and complexity of products, as well as a lack of international comparability, will make it difficult for the government to intervene meaningfully.
Sasol was also threatened with a windfall tax for its perceived excess profitability. Merrill Lynch argues that this could be largely because its plan to spend only R2-billion, or 12,5%, in South Africa of its proposed R16-billion capital expenditure, may be what irks the government.
On the cement industry, the report argues that if increases remain below 10% for the year, the industry will be left alone.
On telecommunications, the report notes that fixed-line prices increased by an average of 21% a year between 1997 and 2004. South African prices are said to be among the highest in the world. The most likely approach will be the regulator putting pressure on prices while the government promotes competition to help South Africa become more competitive. — Thebe Mabanga