DTI admits to naivety in steel industry deals

21 August 2016 - 02:01 By BRENDAN PEACOCK

It is no small irony that steel is described as an endlessly recyclable resource. The global steel market, too, seems destined to lurch from boom to bust in line with global economic cycles and infrastructure development.Fifteen years ago as steel prices plumbed the depths, the then Iscor, weighed down by debt, loss-making operations and technical difficulties at its Saldanha Steel plant, signed a three-year agreement with Lakshmi Mittal's LNM Holdings for business assistance.Obtaining equity in return for success in meeting cost-cutting thresholds, as well as an option to buy out minorities, LNM - then the world's fourth-largest steel maker - took control of Iscor in 2004.In the same year Ispat International - also controlled by Mittal - acquired LNM Holdings and the company was renamed Mittal Steel.It merged with Arcelor in 2006, becoming the world's largest steel producer.story_article_left1In the ensuing decade ArcelorMittal South Africa resisted calls from the government and customers to deliver products at "developmental pricing", while its input costs were kept low by Iscor's existing preferential supply agreement from Kumba Iron Ore.In 2009 Amsa failed to convert its portion of the old-order Sishen mining right to a new-order mining right and Kumba applied to obtain 100% of the mining right.The following year Kumba cancelled the cost-plus 3% contract to supply Amsa. The companies went to arbitration, eventually agreeing on a cost-plus 20% renegotiated arrangement for a predetermined quantity of iron ore annually.In 2013, when the price of iron ore fell dramatically due to the global economic slowdown, Amsathreatened Kumba that it would import iron ore at a price below their cost-plus arrangement.Amsa fell foul of South Africa's competition authorities, repeatedly being brought to heel for collusion and abuse of its market dominance.This culminated in the Competition Commission imposing the country's biggest-ever fine, of R1.5-billion, on Amsa last year.It was generally a bad year for the company, which made a loss of R8-billion.It had to apply for pricing protection from the government in the form of a 10% tariff on imports, further safeguards for locally produced steel, and provision for the forced inclusion of locally made steel products in infrastructure projects.Lionel October, director-general of the Department of Trade and Industry, said the department had learnt some hard lessons about unbundling a parastatal with such a dominant market position."We sold Iscor as is, basically converting a public-sector monopoly into a private one," October said.story_article_right2"We met with the ArcelorMittal global CEO a few months ago and they have also learnt their lesson - they made no serious investment in plant machinery, equipment, in upgrading technology. They just drew massive profits during the boom and abused their market power."According to October, the global steel glut, mainly from China, and falling prices had made ArcelorMittal change course."They're upgrading and have agreed to a price basket to keep them within range, although of course every company has a profit motive and they'll push that as far as they can."He said the Department of Trade and Industry had had to strike a balance because the country needed both a primary steel industry and a competitive market."Our main goal is to make this as close as possible to a competitive market and move against abuses of power. It's in our interest that Amsa survives and grows, and right now it doesn't have pricing power. The tariffs are still low by international standards."October said it would be inconceivable not to have a primary steel industry in a country as rich in iron ore as South Africa was."We were naive. There was really low confidence in the local market at the time Iscor was sold, and the Industrial Development Corporation was overexposed to steel."There was a strategic decision to bring in a global player, but the department didn't set down clear conditions like we do now with investors like Wal-Mart and AB Inbev.story_article_left3"The prevailing tide then was to not interfere with the private sector."Amsa charged what it liked and the IDC wasn't even profiting from its investment because the company took out all its money via management contracts, paid low dividends to shareholders, made absolutely no investment. It sweated its assets to the point where plants were collapsing."October said the department now had a more assertive approach to industrial policy, reflected in its interactions with Transnet and Eskom."We managed to arrest the big danger - the potential closure and loss of jobs at Vanderbijlpark and other plants. We faced decimation like we'd seen in clothing and textiles. The IDC stepped in to save Scaw Metals and we're rebuilding the industry."He said the search for other international investors to bail out embattled players like Highveld Steel had come to nothing because of a global lack of appetite for expansion, but that luring new competitors to the local space would help keep prices down in future.Neither Amsa nor the parent company based in Luxembourg was willing to comment...

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