The showdown between gold-producer Harmony and steel group Mittal
Steel South Africa over steel prices took an interesting turn last
week, when the steel company announ-ced that it would not increase
its domestic steel prices on flat and long products for May and
June, despite an internal study indicating that it would be within
its rights to do so.
The announcement came only days after Harmony called for par-
liamentary hearings into the way steel prices are set for the
domestic market, arguing that it was concerned about the lack of
trans-parency in the Department of Trade and Industry’s
(DTI’s) negotiations with Mittal, which have been under way
for more than a year. The talks are designed to replace the
con-troversial import parity pricing (IPP) mechanism with a
so-called ‘developmental’ model.
Mittal said the pricing decision followed a recent bmills and crushers auckland new zealandenchmarking of
international steel-price trends, which, Mittal claims, justifies
an upward adjustment of as much as five per cent on a number of
steel grades.
CEO Davinder Chugh said that, despite the benchmarking exercise,
the weakening rand and an increase in steel prices in some markets,
the group had decided against any steel-price increases for the two
months in question.
“This is significant in view of massive price increases for
raw materials like coking coal and their cost implication,”
Chugh said, adding that the company felt the dhenan zenith crusherecision would go a
long way to bene- fiting the domestic market.
Chugh has already made it clear that he does not want the
antag-onistic relationship with key clients, including those in the
gold-min-ing industry to continue. Under his leadership the company
is bench- marking domestic steel prices charged locally with those
in other emerging markets, which has already led to a decrease in
domestic prices for most of its flat steel products. Flat prices
fell by an average of eight per cent in January and its
colour-coated steel by an additional four per cent in February. A
general price reduction of five per cemining and stone crusher in mizoramnt was applicable on the
majority of the company’s long steel products in
February.
Harmony cautiously welcomed Mittal’s announcement, saying
that it could signal a turning point in the process. The gold-miner
suggested that it was an acknowledgement that price increases of
about 40% in rand terms over the last two years had been
disadvantageous to the local downstream industry.
The company added that it could also mean that the issue was
starting to receive the profile it rightly deserves within Mittal,
and that its internal benchmarking was showing that local steel
consumers were still disadvantaged when compared to users in
countries such as South Korea, China and the Republic of
China.
However, it also indicated that it remained unhappy with the IPP
formula, especially as steel currently comprises 12% of
Harmony’s input costs.
The current system allows Mittal to use an international benchmark
price, but include all international and domestic transport,
handling and tariff charges. Harmony cal-culates that the formula
means that local prices are currently about 40% more than
Mittal’s export price.
It, together with DRDGold, has also referred its allegations of
excessive pricing directly to the Competition Tribunal, following a
Competition Commission ruling in 2003 that found the use of IPP to
be justified.
Government, in the meantime, has defended the negotiation pro-cess,
with the DTI’s Nimrod Zalk suggesting that the perceived
slowness was a consequence of the complexities involved, as well as
DTI’s chosen approach of broad-based consultation.
“From our side, we don’t have concerns about the
process and we think our approach has been correct,” Zalk
said, adding that talks were ongoing and had definitely not
stalled.
It is believed that the DTI would like a model that is not only
com-petitive with domestic prices charged elsewhere, but also takes
into account South Africa’s low cost of production and
geographic isolation. Mittal, on the other hand, believes a
cost-reflective model has to yield to one that is market-related.
However, it appears willing to accept that its domestic selling
prices should benchmark with domestic selling prices charged
elsewhere.
Chugh also continually stresses the company’s ongoing
commitment to the existing system of rebates, to which the company
contributes R450-million yearly. He says there are also
sector-specific offtake arrangements in the automotive, appliances
and packaging sectors, which offer better price packages on about
250 000 t/y of the 3,8-million tons-a-year Mittal Steel South
Africa sells into the domestic market.
Mittal’s decision also follows a landmark pricing ruling by
the Competition Tribunal, where it ruled that petrochemical giant
Sasol could no longer charge differential prices in respect of
creosote.
The ruling states that a dominant firm must have a very solid
jus-tification for differential pricing if it is not to contravene
the price discrimination provisions of the Competition Act.