‘Fair’ steel pricing model will cap good-times upside, offer bad-times collar

31st July 2015 By: Terence Creamer - Creamer Media Editor

‘Fair’ steel pricing model will cap good-times upside, offer bad-times collar

Photo by: Duane Daws

Embattled South African steel producer ArcelorMittal South Africa (AMSA) has offered insight into the “fair pricing model” it has tabled before government in return for tariff protection and a government stipulation that locally manufactured steel be designated for use in public infrastructure projects.

The model, CEO Paul O’Flaherty revealed at the weekend, would be premised on an “efficient” cost of production, plus a reasonable, but capped, margin for the “good and bad times” – the JSE-listed company was expecting excessive global steel capacity, low global iron-ore prices and depressed steel markets to prevail for four to five years.

Efficient costs would be calculated using agreed key performance indicators, but would also depend on prices being paid for certain key inputs, including iron-ore. AMSA indicated separately that it was seeking to reopen negotiations with Kumba Iron Ore on the current long-term pricing agreement, which it described as unsustainable.

The JSE-listed group was currently producing hot-rolled coil (HRC) at a cost of $450/t, which was still too high relative to “subsidised” Chinese steel imports, which had secured a sizable foothold in the South African market during the first half of 2015. AMSA estimated that Chinese HRC was being produced at $378/t and landing in South Africa at $422/t.

It was hoping to reduce its costs to $400/t, but no time frame was provided for meeting that objective.

“In the good times [under the proposed model] AMSA making 30% margin will not happen – AMSA making a reasonable return will happen,” O’Flaherty outlined.

The group had calculated a healthy margin as being 19% above earnings before interest, tax, depreciation and amortisation, but the cap being negotiated with government was likely to be below that level. “There are a whole range of actions we will then need to take to live within our means – which we will do,” O’Flaherty explained.

Should the model be accepted, however, it would have far-reaching implications for the way the investment community valued the company, with O’Flaherty indicating that a minority shareholder would “have to value us almost like a utility”.

Besides the pricing model, AMSA was also offering investment and broad-based black economic–empowerment (BBBEE) commitments in return for greater government support.

Should this “high road” of protection and designation be taken, AMSA would invest R4.5-billion over the coming five years, with the main project being the R1.1-billion Saldanha mill reline.

O’Flaherty also announced BBBEE progress, including a 5% employee share ownership scheme, which would be presented for shareholder approval in September, and a 21% empowerment transaction, the details of which were still to be finalised.

“But we need localisaiton and we need tariff protection, otherwise we are down the low road and the low road is a really tough road. We will still be around in the end, but in a very different [and streamlined] form.”

He said that while government was expressing support for the industry, time was of the essence. “It needs to happen and it needs to happen quickly, because once you start the low road, you can’t come back.”

AMSA had already submitted five applications to the International Trade Administration of South Africa (Itac), which would adjudicate whether an increase in tariffs to the “bound” rates of between 10% and 15% was justifiable in the current circumstances. South Africa currently applied no duties on primary-steel imports.

However, O’Flaherty indicated that up to 11 applications would eventually be submitted and that some of these could be followed up with an application for Itac to conduct antidumping investigations.