SA's new industrial policy pins its hopes for faster growth and job creation on reviving the manufacturing industry, which is highly steel-intensive.
SA's manufacturing sector, according to the department of trade & industry (DTI), has performed poorly over the past 10 years because of low profitability. One of the reasons for this is monopolistic provision and pricing of key inputs into manufacturing, including steel.
Almost 80% of steel sales in SA are directed at the manufacturing and construction sectors. In addition, basic iron and steel are significant inputs into one of the chosen sectors of the second Industrial Policy Action Plan (IPAP2) - metals fabrication, capital and transport equipment. Government thus has a strong interest in ensuring SA gets iron and steel at competitive prices.
In the IPAP2 released last week, the DTI says that it will tackle the high price of strategically important inputs such as steel, warning that "anticompetitive practices will be targeted, particularly where these concern intermediate inputs to downstream, labour-absorbing production".
It promises at least one competition commission investigation a year into such areas and threatens wider sanctions against offenders. But despite several commission rulings, which have helped improve the fairness of steel pricing, the DTI is nowhere near achieving a developmental price.
Trade & industry minister Rob Davies acknowledged this last week: "Steel is a very significant product in metals fabrication... that is one of the things we're going to have to grapple with. Yes, we haven't yet cracked it... but we will continue to try and get a developmental price for steel."
About three years ago, ArcelorMittal SA changed from an import parity pricing model (where it added 10% to the global steel price to compensate for transport, logistics and other costs) to basket pricing - an average of the domestic steel prices in two developing countries (China and Russia) and two developed countries (Germany and the US). In theory, this wiped about 10% off SA's domestic steel price.
The competition tribunal, however, was scathing of the new model. In fining ArcelorMittal SA R691m in 2007 for charging an excessive price for flat steel, the tribunal said the real basis for the pricing regime was market segmentation and the limitations that the company imposed on arbitrage between the segmented markets - but this had never been disclosed to the DTI.
This system contractually prevented the steel giant's customers who got steel at a discount to the domestic list price from passing on any discount. This had caused "considerable damage to the structure and fabric of the economy", the tribunal said.
It accused ArcelorMittal of having engaged the DTI "in a meaningless series of discussions" in which it ultimately proposed a pricing model (basket pricing) that remained conceptually identical and did not differ materially from its older import parity pricing model. This seems to have been "assured by the selection of countries in the basket", it ruled.
The DTI wants only the world's lowest-cost producers in the basket. ArcelorMittal disagrees, arguing that its prices are globally competitive and its steel of a high quality, which the price should reflect. So the parties are miles from agreeing on a developmental price. Perhaps the row with K umba will jolt them into active negotiations.
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