Steel price rigging 101
South African steel giants have been running a cartel for almost 10 years and have divided up major private and public infrastructure projects that are worth billions of US dollars, according to evidence collected by the Competition Commission.
The commission’s referral affidavit alleges that the four steel manufacturers divided up the supply of steel to major infrastructure projects such as the Coega Harbour development and the Hillside and Mozal aluminium smelters.
The affidavit references a number of letters, faxes, emails and handwritten notes where the steel manufacturers’ senior management openly discuss the arrangements between them, which the commission alleges amount to collusion.
The Competition Act allows for a maximum penalty of 10% of annual turnover, so for ArcelorMittal, named as the ringleader, with a turnover of R39,9-billion last year, its fine could be a whopping R3,99-billion.
This week the commission referred its investigation into the steel manufacturers to the Competition Tribunal for prosecution, alleging that ArcelorMittal South Africa, Cape Gate, Cape Town Iron and Steel (Cisco) and Scaw South Africa were part of a steel cartel that had colluded to divide markets, share information and to fix prices and trading conditions between 1999 and 2008.
The South African Iron and Steel Institute (Saisi) has also been included in the referral, because the commission alleges that the industry body facilitated the sharing of sensitive information.
The South African and Mozambican governments will be paying close attention to the tribunal proceedings, because they both have significant investments in affected projects.
While the four manufacturers involved could incur massive fines if found guilty, it is also possible that both governments and other major investors such as BHP Billiton and the Mitsubishi Corporation will launch civil cases to claim damages.
The Competition Commission launched its investigation into the steel manufacturers on April 22 last year and on June 19 they raided the premises of Highveld Steel, Cisco and Saisi. Following these raids Scaw approached the commission to cooperate with their investigation and on July 21 it applied for corporate leniency.
Scaw confirmed that there had been a long-standing culture of cooperation among the steel mills regarding the prices charged and discounts offered for their products. Scaw also stated that this cooperation extended to arrangements on market division.
The commission’s affidavit says that further investigation by itself confirmed what Scaw had stated and it also uncovered further evidence of anti-competitive practices.
The commission alleges that some of the anti-competitive practices detailed in the affidavit took place before the Competition Act was promulgated, but that even after the new legislation was in place, the steel manufacturers continued to collude.
The most damning evidence included in the referral affidavit is of the division of major infrastructure projects such as Coega Harbour and the Hillside and Mozal aluminium smelters.
“In the period between 1999 and 2005 there is evidence that the steel mills reached agreements or arrangements to share work emanating from three large construction projects, namely the construction of the Mozal Aluminium Smelter in Mozambique, the construction of the Hillside Smelter in Richards Bay and the construction of the Coega Harbour,” says the affidavit. “The existence of the agreements, arrangements or understandings among the steel mills is evident from an exchange of emails.”
The affidavit then quotes from an email dated August 15 2003 that was sent from Cape Gate’s Xavier Coetzee to ArcelorMittal’s former CEO, Gary Walton.
It states: “Sometime back we discussed the sharing of the Coega tonnage between all players (similar to the Mozal and Hillside) and at that date you indicated a problem on the Hillside sharing.”
The affidavit then refers to a follow-up email dated September 25 2003, which Coetzee sent to Walton and the other steel mills where Coetzee discussed how the Coega contract should be divided up, saying that all four mills should get 2250 metric tons of the 9000 metric tons contract, but that Cape Gate was not getting its fair share.
The affidavit also details numerous meetings between senior management of the four steel players that took place at the offices of the four companies, restaurants and once at OR Tambo International Airport.
At these meetings it is alleged that prices and discounting for the local and export markets were agreed upon and the steel manufacturers also agreed to not target each other’s traditional customers.
Between 2004 and 2008 the commission alleges that the meetings became irregular and “were replaced largely by telephonic discussions and other forms of informal contact”.
The affidavit also mentions a number of senior managers who were present at these meetings, including Martin van Wijngaarden, Gary Walton, Ernst Volschenk and Johnny Venter for ArcelorMittal; Chris Booysen, Tony Harris, Lawrence Erasmus and Johan Burger for Scaw; Rob Noonan, Danie Theron, Jimmy Windt and Hendrikus Delport for Cisco and Xavier Coetzee, Henry du Toit, Koen Otto and Nathan Friedman for Cape Gate.
The affidavit describes ArcelorMittal as the ringleader, alleging that it generally led price discussions and was the first to publicly announce the increases. “The other steel mills were expected to follow the price increases announced,” the affidavit states.
ArcelorMittal’s Sven Lunsche said the company had taken note of the commission’s referral of the investigation: “We will cooperate with and present our case to the regulatory authorities in due course.”
Cisco’s general manager, Jimmy Windt, said the company’s legal team was looking at the referral affidavit. “We will most certainly be defending the case,” he said. “We have our side of the story and we will be trying to get that across to the powers that be.”
Saisi’s Johan Nel said the institute had taken note of the affidavit and had referred it to its legal counsel. “We’ll have to take it from there,” he said.
Cape Gate’s Nathan Friedman refused to comment.
Attempts to get comment from the Department of Trade and Industry and the Mozambiquan government were unsuccessful.
BHP Billiton said it had noted the referral of the complaint by the commission to the tribunal and would be undertaking an assessment of the referral documentation. “At this early stage, however, we cannot comment on the contents of the referral nor pre-empt any particular outcomes.”
Big Infrastructure Projects
The Mozal aluminium project, which was built between 1998 and 2003, cost $2,22-billion (R17,5-billion). The smelter, which is situated 17km from Maputo in Mozambique, is operated by BHP Billiton, a 47,1% shareholder. Other shareholders include the Mitsubishi Corporation (25%), the Industrial Development Corporation (24%) and the Mozambiquan government (3,9%).
The Hillside aluminium smelter was built between 1993 and 1995 and is situated in Richards Bay. In February 2003, BHP Billiton—the sole owner of the smelter—decided to expand the project at a cost of $411-million (R3,2-billion), making it the largest aluminium smelter in the southern hemisphere. The Coega project is said to have cost R7-billion and is aimed at attracting major foreign investment.