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‘Holistic’ steel solution involves ‘fair pricing’ versus protection trade-off

15th July 2015

By: Terence Creamer

Creamer Media Editor

  

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ArcelorMittal South Africa (AMSA) CEO Paul O’Flaherty says he is optimistic that a “holistic” solution will be found by September this year to the sustainability challenges currently being experienced by the domestic steel industry.

He confirmed in an interview with Engineering News Online that the industry was seeking greater protection from steel imports, which had risen to historical highs of between 35% and 40%, as well as for regulations stipulating that locally made steel be used in public infrastructure projects. In return, the industry would subject itself to a new “fair” pricing model and would make investment and employment commitments.

A panel of steel-industry experts established by Economic Development Minister Ebrahim Patel was deliberating on the new pricing model, which would replace the controversial import-parity-pricing methodology currently used by AMSA.

However, parallel processes were being pursued with the International Trade Administration Commission of South Africa (Itac), which is authorised to investigate applications for tariff protection, and the Competition Commission, which is expected to offer its opinion on whether the proposed pricing model passes Competition Act muster.

Itac confirmed with Engineering News Online that its adjudication of an application for an increase in customs duty (from free of duty to 10% ad valorem) was at an advanced stage and that its recommendations were being finalised for submission to Trade and Industry Minister Dr Rob Davies.

Department of Trade and Industry (DTI) deputy director-general Garth Strachan told Engineering News Online earlier that government would support the application, as it was “extremely concerned” about the state of the industry, which was facing intense import competition amid weak domestic and international demand.

O’Flaherty said that the current global oversupply situation had resulted in steel prices falling to multidecade lows and a strong rise in imports into South Africa. On average, AMSA had lowered its flat- and long-steel prices by about 10% this year, while domestic market demand was expected to remain flat at around five-million tons in 2015, which was below the 5.4-million tons consumed in 2013.

However, Strachan also indicated that government would be seeking “trade-offs” to improve conditions in the longer term for domestic steel consumers. Government had opposed AMSA’s pricing policies for a number of years, arguing that the group’s approach had resulted in domestic consumers paying prices that were in the highest quartile globally.

O’Flaherty stressed that application of tariff protection to the “bound” rate allowed for by the World Trade Organisation would not automatically result in a commensurate rise in domestic prices. Instead, it should reduce opportunistic importation into a market that was vulnerable, owing to the fact that there was currently no protection in place.

“We are not asking for a new set of tariffs, these tariffs are there, but are not being applied. We are also not saying that if we get 10% we will automatically increase your price by 10% – not at all.”

However, AMSA was of the view that certain Chinese products were being subsidised and were entering South Africa at prices that did not reflect production costs. “It’s very difficult to compete against people who are coming into the country at below their cost of production.”

O’Flaherty also emphasised the protection was but one component of a larger package of measures that sought to balance the sustainability of steel producers with government development plans.

“If there is a fair pricing model, it also means you have a sustainable business. Then we can make commitments to future investments and jobs,” he explained, indicating that it might also result in changes to certain rebates currently on offer to domestic consumers.

O’Flaherty said the process of settling on a solution was complex as it involved many moving parts. “But there is movement and, ultimately, there will be trade-offs and decisions,” he said, indicating that he expected resolution by no later than September.

How seriously AMSA was treating the matter was underlined by the visit in mid-June by Lakshmi Mittal, the CEO of the ArcelorMittal group, which owns 52% of AMSA.

“It was great to have a major shareholder coming down and showing support for the local operation,” O’Flaherty said.

Edited by Creamer Media Reporter

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