Mining Weekly

Steel producer ArcelorMittal South Africa (AMSA) has set up four bilateral working groups with various government departments and State entities in a bid to deal decisively with what current CEO Paul O’Flaherty describes as debilitating “legacy issues”, including the highly contentious issue of domestic steel pricing.

The regular meetings, chaired by O’Flaherty personally, were being conducted with officials from the Department of Trade and Industry, the Economic Development Department, the Industrial Development Corporation (IDC) and the Competition Commission and cover various themes with the intention of resolving a range of disputes over a three- to six-month horizon.

Much attention was being given to finding an acceptable pricing solution, as differences in this area had been the cause of much antagonism between AMSA and government ever since the unbundling of Iscor into separate mining and steel companies in 2001.

Government continued to assert that the steel group was charging excessive prices to domestic consumers – claims that were also at the root of a flurry of competition cases against the company, including five active cases that had been referred to the Competition Tribunal.

In fact, AMSA’s flat-steel price was the subject of the country’s first-ever excessive pricing complaint, which was referred directly to the tribunal in 2004 by gold-miners Harmony and DRDGold.

Having been found guilty of pricing excessively and fined a record R691.8-million, AMSA appealed the ruling in 2007. The Competition Appeal Court referred the case back to the tribunal to hear fresh evidence, but the case was eventually settled before new proceedings were held.

O’Flaherty said the aim was to strike a balance between the needs of AMSA to be profitable and government’s desire for a pricing model that was more accommodative of downstream manufacturers.

“Currently the price that we charge to the local market is connected to international raw material prices . . . and the issue is [whether] that price is appropriate for South Africa. Should [we] not be charging on a lowest-quartile basis, or based on your own raw materials, et cetera. So we are trying to find resolution on that.”

For it’s part, AMSA was emphasising that many of the costs that underpinned its competitiveness remained out of its direct control, while also highlighting a continual erosion of the raw material and energy advantages that government still assumed AMSA enjoyed. The company had made losses for five consecutive years, including in 2014, in which it recorded a net loss of R158-million.

In parallel, the JSE-listed group was also pushing for locally produced primary steel to receive preference in government’s procurement framework, as well as for greater import protection.

O’Flaherty described China as a “wild card” for the steel market in 2015, noting that there had been little effort to curtail production, despite falling domestic demand within the $10-trillion Asian economy. AMSA estimated that there could be as much a 300-million tons in exports seeking markets during the year.

“South Africa is one of the few countries in the world without any protection on primary steel,” O’Flaherty noted, adding that the industry was thus highly vulnerable to a surge in imports. AMSA was also eagerly awaiting the outcome of applications for protection on four product categories, two flat-steel and two long-steel products.

The group was also playing “open cards” with the IDC regarding the development finance institution’s plans to support the Hebei Iron and Steel Group, of China, in building a $4.5-billion, two-phase project planned in the Phalaborwa area of the Limpopo province.

Describing any decision to create new primary steel capacity in South Africa as “brave” in light of the weak market dynamics, O’Flaherty said the group would seek to have constructive discussions with the IDC, which remained a key minority shareholder in AMSA.

Also up for discussion, was the potential for a carbon tax and its implications for AMSA, enterprise development and the group’s role in the infrastructure programme.

The working groups were set up as part of an effort, O’Flaherty says, to “formally go and resolve our issues”.

“We need to deal with our legacy issues, we needs to deal with our pricing issues, we need to take our rightful place as a proudly South African company that can contribute to the development of this country.”