ArcelorMittal’s Saldanha Bay ,R600/t Sishen surcharge evokes angry SA govt responseApril 1, 2010 by: admin
The decision of JSE-listed steelmaker ArcelorMittal South Africa (AMSA) to impose a R600/t Sishen surcharge on the steel that it sells has evoked an angry response from the South African government, which described the surcharge as “unjustifiable”.
As a consequence, South Africa’s Department of Trade and Industry (DTI) said that it would be referring the matter to the Competition Commission to investigate AMSA for “abuse of dominance and excessive pricing”.
Simultaneously with AMSA CEO Nonkululeko Nyembezi-Heita announcing at a media conference that May 1 would be the date of AMSA’s effective 10% steel price surcharge, the DTI charged that the steelmaker was signalling “that the South African economy is expected to bear the cost of its commercial error, which in turn will hamper our industrialisation efforts”.
The DTI said that AMSA had committed a “grave commercial error in failing to convert its old-order mining rights to new-order mining rights by the cutoff date prescribed in the Mineral and Petroleum Resources Development Act”.
The date prescribed in the Act was April 30, 2009, and on May 4, 2009, two companies applied for AMSA’s 21,4% undivided share in the Sishen mine, with a prospecting right covering that entitlement having been subsequently granted to little-known black empowerment company Imperial Crown Trading 289 – a matter which is itself the subject of appeal by Kumba Iron Ore’s (KIO’s) 74%-held Sishen Iron Ore Company (SIOC), which mines the resource and which applied for a mining right over AMSA’s lapsed right.
But Nyembezi-Heita contended AMSA’s profit margin was currently 18% compared with that of KIO’s profit margin of 55% and that commercial rates for iron-ore would reduce its margin to 14%.
AMSA’s action followed the signal by SIOC that it was no longer obliged to supply 6,25-million tons of iron-ore at a special price of cost plus 3%, owing to AMSA’s right to a portion of the Sishen mine lapsing through its failure to convert the mineral rights to new-order rights.
Nyembezi-Heita said that “by any stretch of the imagination”, SIOC’s step was an “extraordinary event” and, in order to take account of the “massive differential” between the commercial price and the cost plus 3% price, AMSA would introduce a “Sishen surcharge” of R600/t of steel that it sold in South Africa from May 1, which was roughly $80/t at Tuesday’s exchange rate.
Nyembezi-Heita added that it was not AMSA’s intention to benefit “in any way, form or fashion” from the additional surcharge and that it had told its South African customers that, in the event of arbitration victory against KIO, the accumulated surcharge plus interest would be refunded to customers in full.
But should AMSA lose the arbitration, the money raised through the surcharge would become available “partly” to fund the amount that would be payable to KIO at that stage.
She said that the R600/t surcharge did not go all the way to mitigating the cost differential between the KIO commercial charge and the cost plus 3%.
“If we had to calculate very crudely what the full impact would have been on just the domestic sales that we foresee for the remainder of 2010, a surcharge of closer to $150/t would have to have been charged,” Nyembezi-Heita said.
KIO was, she said, still charging at the cost plus 3% and had not yet imposed commercial pricing, although KIO’s SIOC had given notice of its entitlement to do so and a dispute resolution procedure under the agreement had been initiated.
The Sishen surcharge would be based on the additional iron-ore cost, based upon the international spot price for iron-ore that SIOC asserted it was entitled to charge, which AMSA disputed.
Although AMSA would continue to export steel in the short term, this would not be profitable when taking into account iron-ore input costs as claimed by SIOC, as well as current steel prices.
Management would continue to review the profitability of operations and, if necessary, adjust the commercial policy and production levels, which might necessitate plant closures. Meanwhile, all 11 000 jobs would be preserved and steps would be taken to introduce a broad-based black economic-empowerment programme.
While fuller comment on possible plant closure would be given in three months time, it was already certain that the Saldanha Steel plant would face the biggest threat of closure from export weakness.
AMSA said that it was considering its rights on the written contention of the Department of Mineral Resources on March 17 that it had forfeited its 21,4% undivided share of the old-order right from May 1, 2009.
Further, AMSA was engaging SIOC over what it alleged was overcharging in the past few years.
However, an unsympathetic DTI said that AMSA had consistently argued that there should be no link made between its costs of production and its pricing of steel in the South African market, in the context of a long period of concessional access to iron-ore on a cost plus basis.
“AMSA claims to price its steel according to a ‘basket’ of international steel prices comprising four countries: the US, Germany, China and Russia. Producers in all of these countries are subject to commercial costs of iron-ore,” the DTI noted, adding that the iron-ore surcharge amounted to double counting.
“Further, since at least January 2009, AMSA has been pricing steel above its own international ‘basket’ price,” the department said.
Government said that it had taken note of the Competition Tribunal’s 2007 findings in the country’s first-ever excessive pricing case – which was lodged against the steel producer by gold-miners Harmony and DRDGold – that, absent alternative remedies, “divestiture may constitute the only appropriate remedy”.