Steel giant hobbled by ball and chain ahead of crunch hearings on import protection

Having been handed a R1.5-billion fine, the largest in South African competition law history, serial offender ArcelorMittal South Africa (Amsa) has also agreed to limit its profits (earnings before interest and tax) on flat steel products over the next five years to no more than 10%.

This can be seen as a kind of ankle bracelet, which offenders can be made to wear while under house arrest, but the steel maker has not admitted to any criminal activity and as such the profit limit is possibly more like a ball and chain for the company.

The previous highest fine meted out by the Competition Commission was the R1-billion handed to Pioneer Foods in 2011.

The fine will be good news for local steel consumers and for the government: Amsa has to pay back at least R300-million a year in fines for the next five years while putting a handbrake on its profits. It has also committed to R4.64-billion in capital expenditure over the next five years. The steelmaker has not, however, admitted to excessive pricing.

The Amsa share price has fallen 3.2% in the past week and by midweek was trading at R7.27. This is down 11% in the last 30 days and is 40% year on year.

For more than a decade, the Competition Commission and the trade and industry department have been pushing the steel giant to offer developmental steel prices to local industry. During this period, the spotlight has been shone on Amsa’s conduct in the long steel cartel, the scrap metal cartel and the flat steel cartel, and on alleged discriminative pricing for wire rod.

In 2012, with the economic downturn in full force and global steel capacity increasing, steel imports began flooding into South Africa. The local steel industry took a beating, with imports increasing by 243% between 2012 and 2015, according to South Africa’s International Trade Administration Commission (Itac).

Now the local steel industry is beating down Itac’s door, seeking protection. And, in the week before a decision is taken on that protection, Amsa has settled all outstanding matters with the Competition Commission.

One competition law expert told the Mail & Guardian this week that the Itac hearings and the settlement could be related, as it would help to have the government on board supporting a call for the local steel industry’s protection.

When you take into account that cartels in long steel, scrap metal and flat steel are alleged to have run for almost a decade each, the fine is probably small change compared to the profits the cartelists amassed.

Commissioner Tembinkosi Bonakele said the regulatory body was “delighted” to bring these “longstanding proceedings” to an end.

“The penalty sends a strong message of deterrence and is an important milestone in the commission’s enforcement against cartels,” said Bonakele. “In addition, the pricing remedy reflects our desire to protect South African consumers against dominant firms, particularly on key industrial products.

“This remedy is a safeguard in the event that Amsa were to revert to the historical prices that the commission regards as excessive.”

Collusive dealings timeline

In 2003, the commission received a complaint from a number of wire producers. They alleged that Amsa was differentiating between its customers in discounts offered on low carbon wire rod.

After investigating, the commission agreed that price discrimination had taken place between 2000 and 2003. It referred the matter to the Competition Tribunal in 2007. Another complaint, claiming that Amsa’s conduct had continued until 2006, was also referred to the tribunal.

The commission launched its long steel cartel investigation in April 2008, raiding corporate head offices in June of that year. Its investigation found that Amsa, Cape Town Iron and Steel Works, Scaw and Cape Gate had been fixing prices and discounts, sharing price-sensitive information and dividing up markets.

Scaw, a subsidiary of Anglo American, applied for leniency in 2008 and was granted immunity in return for helping build a case against the other players.

The commission referred its case to the tribunal in 2009, alleging that the cartel had been running between 1999 and 2008. In its referral affidavit it emerged that the steel companies had divided up tenders for the Coega harbour, the Hillside aluminum smelter in Richards Bay and the Mozal smelter in Mozambique.

The affidavit painted Amsa as the ringleader that led price discussions and was first to announce them, with the rest following.

In 2008 the commission started probing the flat steel market, finding that Amsa and Highveld Steel had fixed prices and allocated markets for more than a decade, from 1999 to 2009. The case was referred to the tribunal in 2012.

In 2009 the commission turned its eye to the scrap metal market and found that Amsa, Cape Gate, Scaw and Columbus Stainless Steel had been fixing the purchase price of scrap metal between 1998 and 2008. The case was referred to the tribunal in 2013.

In 2011, the commission received a complaint from the trade and industry department, asking it to look into Amsa’s “excessive” pricing of flat steel between 2009 and 2011.

Down to the wire

Next Tuesday, Itac is holding hearings into whether to allow the South African flat steel industry protection against imports. The affected steel products are used to manufacture containers, mining equipment, wheel rims, bore pipes, earth-moving equipment, farming equipment, gas cylinders, truck trailers, water tanks, railway rolling stock, ship hulls, cranes and wind towers.

Looking at data between January 2012 and July 2015, Itac’s preliminary investigation ruled that there was a “causal link” between the surge in imports and the parlous state of the local industry.

According to the Itac report, Amsa’s sales decreased by 13% between 2012 and 2015 and it did not make any profit over the period. In February 2016 Highveld Steel announced that it had to close up shop.

Applying for industry protection, the South African Iron and Steel Institute argued that there had been an “unprecedented” rise in global steel production capability, which had doubled since 1994 – resulting in a glut of steel products flooding a market with little demand.

The institute said that even with this dire situation for steel producers, a number of countries that are net importers of steel are planning to invest in new capacity.

Itac said in its preliminary report that Amsa’s history of anti-competitive conduct should not preclude it from receiving protection if it was warranted.

“We are pleased to announce that all outstanding matters have now been addressed and a settlement has been reached,” read Amsa’s announcement on Monday, adding that “the company has agreed to a pricing remedy for local flat steel products.”

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Lloyd Gedye
Lloyd Gedye
Lloyd Gedye is a freelance journalist and one of the founders of The Con.

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