Steel of a deal for Zuma Jnr
Duduzane Zuma and the Guptas are at it again—they will benefit from a proposed multibillion-rand Indian steel investment bolstered by government intervention.
BEE miner Afripalm Resources said on Wednesday that a subsidiary, Afripalm Horizons, had signed a memorandum of understanding with the Steel Authority of India Ltd (Sail) to investigate building a R21-billion steel mill in South Africa. Sail, an Indian parastatal, is among that country's top steel producers.
Afripalm chairperson Lazarus Zim, who added the chair of Telkom to his array of board seats last week, said the deal would "ensure the introduc- tion of healthy competition in the local market".
Lower steel prices will fulfil a key developmental objective as they will reduce costs for local manufacturers. The department of trade and industry (DTI) and an interdepartmental task team has led the charge to force down prices in a market dominated by near-monopoly producer ArcelorMittal.
The directors of Afripalm Horizons are Zim, his associate Menzi Mbatha, Tony Gupta, who is one of the Gupta brothers close to President Jacob Zuma, and Duduzane Zuma, the president's son.
The Guptas and Zuma Jnr appear to hold a significant stake in the company (see "Who's behind Horizons?").
Their involvement raises eyebrows as:
- The president's son and friends stand, again, to benefit from a sizeable commercial opportunity leveraged by the state.
There was an outcry over their mega-stake in ArcelorMittal's BEE deal flowing from the controversial awarding of iron ore rights to the politically connected company, Imperial Crown Trading, by the department of mineral resources.
- They appear to have conflicted themselves—they are now tied to both ArcelorMittal, through its BEE deal, and Sail, through the new steel deal. ArcelorMittal and Sail will be direct competitors (see "A marriage unconsummated").
- Sail has signalled it wants cheap feedstock—iron ore and coking coal—from South Africa to make the deal feasible. It is not clear how Afripalm could provide that unless the Imperial Crown Trading rights offered to ArcelorMittal were offered to Sail, something Imperial Crown denies.
The Gupta family declined to respond specifically, saying that they had decided in 2007 'to forgo all government tenders and contracts to stop the continuous insinuation of an improper relationship" and that "the family subscribes to the highest standards of governance and ethics" (see "Guptas claim conspiracy").
Duduzane Zuma said he associated himself with that reply.
Zim refused to comment, saying the Mail & Guardian had sensationalised his and the Guptas' involvement in the recent V&A Waterfront acquisition.
"I think it is better that you do your own research and you can write anything you like without my cooperation."
Government initiatives to reduce steel prices stretch back years, with recurring efforts to force Arcelor-Mittal to lower its prices.
These initiatives, led by the DTI, became more urgent in February last year when ArcelorMittal raised its prices following iron-ore supplier Kumba's cancellation of a long-standing contract to supply ore at cost plus 3%.
The cancellation followed the department of mineral resources' award of rights to 21% of Kumba's Sishen mine to Imperial Crown Trading, owned among others by Gupta associate Jagdish Parekh. The 21% had previously belonged to ArcelorMittal.
By August last year the DTI, with the departments of mineral resources and economic development, formed a task team to investigate how to lower steel prices.
It reported to the Cabinet in November, recommending "a suite of policy instruments", which included legal reform and "promoting new steel investments"—in other words, competition for ArcelorMittal.
By that time negotiations had already started with Sail. News agency Bloomberg later quoted Riaan le Roux, the DTI acting deputy director general, saying the government had started talks with Sail mid-last year.
A senior official who was privy to the initial contact between the DTI and Sail, speaking on condition of anonymity, told the M&G that Afripalm and Sail had already linked up when Sail first contacted the department.
The official said: "We didn't facilitate the connection, but Sail came to us to check whether we are supportive and what incentives the government might offer. Sail is a state-owned company and they get greater comfort when they know there is government approval from the other side."
The timing of the initial contact is commensurate with President Zuma's state visit to India in June.
He was accompanied by a large business delegation including Zim, the Guptas and Zuma Jnr. At the time there were complaints by other business people on the delegation that meetings arranged or approved by the Guptas had dominated Zuma's diary.
In mid-December India's steel secretary, Pradeep Kumar Misra, and Sail's chairperson, CS Verma, visited South Africa.
After the visit, Bloomberg quoted Misra as saying: "The South African government has proposed a joint venture plant with [Sail] and has promised iron ore and coking coal mines for it. We are exploring the idea."
While the talks were clearly at a government-to-government level, Afripalm appears to have cemented its involvement during the Indians' mid-December visit.
Zim, who besides chairing Afripalm Resources is its largest shareholder, resigned his separate chairmanship of Kumba that week, saying he was involved in the formation of a new steel initiative that would conflict with his duties to Kumba.
That the South African state remains involved is clear. A day before Afripalm's announcement of the deal this week, Verma told reporters in India that the company was planning steel plants in four countries, including South Africa, and that "we are talking to the governments".
South African state development financier the Industrial Development Corporation (IDC) said this week that it had been approached by Sail late last year to consider becoming involved.
Mandla Mpangase, the IDC spokesperson, said the corporation "could consider equity participation" but that talks "have been only exploratory".
Whether Afripalm's involvement will help the government in its aim of reducing iron ore prices remains to be seen.
One expert who asked not to be named said this week that a second steel producer might not lead to the kind of competition that would reduce prices but that cheaper feedstock—largely iron ore and coking coal—would.
From that point of view, he said, a steel producer would want its own access to the coal and ore—consistent with Misra's comment in December that the government had promised Sail "iron ore and coking coal mines".
Bheki Khumalo, the mineral resources spokesperson, said this week Sail had made no applications and no rights had been awarded.
The expert said that if Afripalm did not have ore and coal rights to contribute to the joint venture, it would increase, not reduce, costs.
"Afripalm does not seem to make sense apart from ... possibly some political cover ... The more middlemen, the higher the cost," he said.
Afripalm is not known to have coking coal or iron ore rights—unless it has offered Imperial Crown Trading's 21% of the Sishen mine as part of the deal.
Afripalm does not own Imperial Crown, but the Guptas have sway in the company through Parekh, their close associate, who owns 50%.
But offering Imperial Crown to Sail will constitute a serious breach of confidence for ArcelorMittal, which agreed to buy Imperial Crown as part of its BEE deal, which included Zuma Jnr and the Guptas, last August. That sale will be finalised pending a due diligence.
Phemelo Sehunelo, an Imperial Crown director, said this week that the company was dealing exclusively with ArcelorMittal and that he had been unaware of Afripalm's engage-
ment with Sail.
"No, I just read it in the paper," he said.
Who's behind Horizons?
Afripalm Horizons is 51% owned by Afripalm Resources, according to one of its directors, Menzi Mbatha. Afripalm Resources' largest shareholder is Lazarus Zim, its founder and chairperson.
When the company did a major deal with listed Mvelaphanda Resources in 2007, his stake was put at 30% in a shareholder circular. The circular said that the Oakbay Trust, a Gupta family vehicle, held 15%.
But who owns the other 49% of Afripalm Horizons? Neither Mbatha nor Zim would say this week, but Mbatha was quoted by the Sunday Times, when commenting on an unrelated infrastructure deal, as saying that Mabengela Investments would "have all the shares". Mabengela, named after a hill overlooking President Jacob Zuma's Nkandla homestead, is controlled by Duduzane Zuma and Tony Gupta.
Duduzane is a major shareholder in Mabengela—holding up to 50%, according to a source close to the company.
The composition of Afripalm Horizons' board confirms the Zuma and Gupta shareholding. The directors, according to Cipro, are Zim, Mbatha, Duduzane Zuma and Tony Gupta.
A marriage unconsummated
Steel producer ArcelorMittal's chief executive, Nku Nyembezi-Heita, must have felt like the jilted suitor when she realised her new BEE partners, the Guptas and Duduzane Zuma are in bed with a competitor, Sail.
But if that's the way she feels she is not showing it. Her spokesperson, Themba Hlengani, declined to comment after consulting her.
ArcelorMittal's R9-billion BEE deal with the Ayigobi Consortium, announced in August last year, came as a part solution to her major headache, which was that iron miner Kumba had deprived her of cheap iron ore after upstart company Imperial Crown Trading had snaffled up the rights to 21%—previously ArcelorMittal's—of Kumba's Sishen mine.
A forced marriage to get back the family silver seemed the solution and so Imperial Crown's formal owners—and those around them, notably the Guptas and Duduzane Zuma—were cut into Nyembezi-Heita's BEE deal. In addition ArcelorMittal would buy all of Imperial Crown—all subject to a due diligence, of course.
But the due diligence proved another headache—the outcry over the elite, presidentially connected BEE deal raised red flags, not least in terms of the United States Foreign Corrupt Practices Act, to which ArcelorMittal is subject. Which means Nyembezi-Heita's marriage to the Guptas and Zuma Jnr remains unconsummated, so to speak. But whichever way one looks at it, the Guptas and Zuma Jnr appear to have committed a serious breach of faith. They did not respond to specific questions.
This article was produced by amaBhungane, investigators of the M&G Centre for Investigative Journalism, a nonprofit initiative to enhance capacity for investigative journalism in the public interest. www.amabhungane.co.za.