Though they may not expect immediate steel price hikes, apprehensive industry leaders are in no doubt that they are facing a setback.
"After such a deep recession we have been looking for a hint of the sun," says Graeme Smart, CEO of Alt-X listed construction company O-Line Holdings. But a possible increase in the steel price, arising from the standoff between ArcelorMittal SA and Kumba Iron Ore, sucks all the joy out of the recovery.
Manufacturing, automotive and construction industries are expected to be the worst hit, though companies differ on what the knock-on effect will be on their cost base and bottom line. Importing steel would be an option if local prices rose, but it would still drive up costs. (See pricing story on page 34.)
John Wallace, director of manufacturing & construction materials at Group Five, says the industry has had to get used to price volatility recently. Steel prices doubled 18 months ago, and then plunged. Like most steel buyers, construction firms have had to adjust prices accordingly.
Nicky Weimar - Of benefit only to a few
"Even so, ArcelorMittal SA can't pass on increases to its customers willy-nilly. The market won't allow it," says Wallace.ArcelorMittal SA is expected to lose about R17,5bn in net present value if it does not get iron ore from Kumba at cost plus 3%, but Wallace feels the steel giant should absorb some of the costs.
If prices do increase, Group Five says it will explore importing more of its steel. It already brings in steel from Korea for some of its projects - but it is a small percentage of its total demand.
O-Line is also considering forward buying because of its heavy dependence on steel. But it has opted to wait for more direction from ArcelorMittal SA before making a decision. For O-Line, the danger of importing steel is that it will push up costs and make it less competitive. The company has contracts in Madagascar, Ghana and Mozambique and may lose business to Indian and Chinese companies that are able to keep their costs lower.
Smaller firms, which find it more difficult to import, will struggle to work around higher costs and control expenses on a project. Importing requires large amounts of cash and erodes working capital.
The automotive sector, however, is unlikely to be hurt by new price hikes because it has set prices agreed with ArcelorMittal SA.
Toyota SA vice-president Nigel Ward says the motor industry doesn't expect a direct impact on the cost base. According to other industry sources, the sector already pays import prices to ArcelorMittal. But some companies are now in negotiations with the steel giant on prices, which the standoff might not necessarily affect.
SA's manufacturing sector has limped through the recession and been bruised by a strong rand. Parts of it, most notably downstream industries, could also feel the full might of higher steel prices.
Nedbank economist Nicky Weimar says this only is a narrow part of the sector. Downstream industries that add value to produce different steel products would have to look for savings elsewhere in their business, or pass on costs to the client.
It might not be that easy for ArcelorMittal SA to raise prices suddenly, as companies have fixed contracts in place. And some industries that buy very large volumes get discounted rates from the steel giant. But where possible, steel buyers will shift to importing more steel rather than buying locally.
"ArcelorMittal SA's structure is a self-serving, expedient pricing policy which has benefited only a narrow sector of the economy," says Weimar.
If the Kumba deal folds, ArcelorMittal SA will have to find a solution that does not push up prices excessively so as to preserve its relationship with customers.
Ranking the Analysts 2009
