Moves to temper steel giant

Government’s impatience with steel giant Arcelor-Mittal’s decision to hike steel prices could see it force the company to sell some of its local assets, in a bid to end its dominance in the market.

In Parliament this week, Trade and Industry Minister Rob Davies threatened the company with the possible forced divestiture. The company introduced a R600 surcharge on to its steel products because of the ongoing dispute with major supplier Kumba Iron Ore.

The department of trade and industry was so incensed by its implementation it referred ArcelorMittal to the Competition Commission.
As a result of the dispute Arcelor- Mittal and the implementation of the surcharge, local steel prices are expected to rise by 10%.

Davies once again referenced a 2007 Competition Tribunal fi nding against ArcelorMittal where divestiture was first mooted. The possibility of forced divestiture or the sale of at least one of Arcelor-Mittal’s steel plants was seen as a way of ending the company’s structural dominance in the steel market.

The dispute began when Kumba unilaterally amended the contractual price at which ArcelorMittal buys product from Kumba’s Sishen iron ore mine earlier this year. The agreed upon price of cost +3% is a long-standing arrangement that has its roots in the unbundling of erstwhile parastatal Iscor, into what would become ArcelorMittal and Kumba Iron Ore.

Kumba argues that it is entitled to market-related prices—much higher than what it gets from ArcelorMittal. In March ArcelorMittal announced the ‘Sishen surcharge”, to be implemented by May 1. It undertook to set the money aside into an escrow account and refund its customers in the event that ArcelorMittal is successful in arbitration with Kumba.

In the interim, however, the companies have not been able to agree on payment for Sishen product while the arbitration process is under way. Kumba wants ArcelorMittal to pay the cost +3%, and set aside the difference in an escrow account until the matter is resolved, but the parties have not reached agreement.

A Kumba spokesperson said that last Thursday ArcelorMittal paid the money invoiced for March and April but only the cost portion of the payments. No payments for the diff erential were made.

ArcelorMittal has not yet opened the separate escrow account in which to set aside the surcharge payments from its customers. But the company defended its position saying that Kumba has been invoicing commercial prices for iron ore since March 1 2010.

‘ArcelorMittal SA has introduced the surcharge from May 1 2010, to cover the increased cost of iron ore. The surcharge will only be invoiced at the end of this month for deliveries from May 1 2010 and payment will therefore be received at the end of June 2010,” it said in response to questions from the M&G.

It stressed that the surcharge funds will not accrue to ArcelorMittal SA but would be returned to customers or be for the benefit of Kumba should ArcelorMittal SA lose the arbitration. Questions have been raised about the unintended consequences of the surcharge.

Even if ArcelorMittal is successful in the arbitration and refunds its customers, recovery of the money will become more difficult further down the supply chain. ArcelorMittal said it has been in consultation
with customers to find the best way to go about refunding them.

When asked to comment on concerns that steel prices will rise regardless of steps taken to refund customers ArcelorMittal said: ‘It is important to note that steel prices have risen strongly in the past few months on the back of a dramatic increase in iron ore prices. However, your question is highly dependent on the approach eventually adopted to return the surcharge, and is the reason we are consulting our customers.”

The DTI did not respond to requests for comment.

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