A steel at the price

While South African steel prices sky-rocket, it appears that government has ignored the red flag waved by competition authorities last year when they highlighted the fact that excessive pricing was taking place in an uncompetitive and unregulated domestic market.

Arcelor Mittal South Africa announced its plans this week for another hefty price hike, the fourth this year, which will take the total price hike to 60% since January.

This appears to fly in the face of the Competition Tribunal’s findings in September last year, where it concluded that Mittal was guilty of excessive pricing in the domestic market and fined it R692-million.

Mittal was found to be a “super dominant” player that was selling excess steel product internationally, cheaper than it was in South Africa, and preventing international steel traders from reselling the product back into the domestic market.

This assisted Mittal in controlling the supply-and-demand dynamic of the South African market, which allowed it to set the domestic market price just below the cost of importing and transporting steel products into South Africa, thereby maximising its profit margin.

The tribunal’s findings document suggests that one estimate for transport costs put before the tribunal was as much as 47% of the cost of importing steel products into South Africa.

“What clearly emerges is dissatisfaction—and a degree of puzzlement—at the notion that domestic steel prices are based on market conditions in distant markets rather than on supply-and-demand conditions in the South African market,” the tribunal’s findings document stated. “And that national transport charges are levied on a product that is not, in physical reality, transported over the vast and costly distances that nevertheless constitute an important element of the domestic price.”

Mittal has decided to take the case on appeal and it is set to go before the Competition Appeal Court in October this year.

Mittal South Africa’s spokesperson, Tami Didiza, disputed the fact that the Competition Tribunal found Arcelor Mittal South Africa guilty of anti-competitive behaviour.

“We believe the tribunal made an error in its judgement and we are appealing the matter,” said Didiza.
“As we have said on many occasions, our objection is based on the fact that we contend that our pricing policy is fair and that the export rebates we offer to companies exporting our products are not designed to protect our dominant position in the local market, but rather to enable the export of our surplus production.”

Didiza said Mittal South Africa’s price increases are in line with the continued upward movement of steel prices in the world market and are among the lowest in the basket it uses to measure international prices.

The Competition Tribunal stated in its findings document that it was not responsible for regulating the steel price in South Africa, but pointed out that there was a need for regulation because Mittal was “super dominant” and there was little hope of increased competition in the sector.

The tribunal described Mittal as “an uncontested firm in an incontestable market”, which it described as a very rare market-structure for an unregulated sector—as rare as its opposite, “a market that meets the conditions of perfect competition”.

So while the government and particularly the Department of Trade and Industry (DTI) are hot under the collar about soaring steel prices, they may have to point the fingers at themselves. It is yet another case of a former state asset that has been privatised only to come back to haunt the state and its developmental agenda.

The department’s chief director of industrial policy, Nimrod Zalk, said that steel-price regulation was something that government wanted to steer away from. But, he said, Mittal’s inability or reluctance to meet commitments it made to government in terms of investing more in production capacity will force the government to reconsider this stance.

“In light of recent behaviour, maybe the idea needs to be investigated again,” said Zalk. He said the DTI is looking into increasing investment in the sector in the long term, but there is no short-term solution besides the government going down the route of regulated prices.

“Our concern is that there is very slow progress with some of their maintenance and investment programmes, which means there is a shortage of steel in the South African market,” said Zalk. Didiza said Mittal does not understand how the DTI can say it is running slowly, and called on the government department to engage with it on this issue.

Zalk said that the department’s research shows that Mittal South Africa was in the lowest 10% worldwide for input costs to its steel manufacturing plants, yet was in the top 25% of prices worldwide. “Mittal Steel is among the highest priced in the world,” said Zalk. “They are higher than China and the United States and are close to European prices.”

Didiza said Mittal South Africa is not in the top pricing quarter and claimed that its price of $880 per ton for hot-rolled coil was cheaper than Europe ($1 080 per ton), the US ($960 per ton) and China ($920 per ton).

Zalk said Mittal South Africa’s pricing raises serious questions about corporate citizenship in South Africa, but as the Competition Tribunal pointed out in its findings document, when state-owned enterprises are privatised into incontestable and unregulated markets, “shareholder pressure ensured that the likely profit maximisation strategy was the charging of excessive prices”.

“Shortly after its privatisation, a state-owned monopoly had effectively been transformed into a privately owned and unregulated monopoly,” said the tribunal’s findings document.

Lloyd Gedye

Client Media Releases

ITWeb, VMware second CISO survey under way
Doctoral study on leveraging the green economy
NWU's LLB degree receives full accreditation
Trusts must register as home builders
Making a case for prepaid water usage