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State should seize iron-ore initiative and move debate into developmental realm

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State should seize iron-ore initiative and move debate into developmental realm

12th March 2010

By: Terence Creamer
Creamer Media Editor

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Without question, there is very little sympathy out there for ArcelorMittal South Africa in its fight to hold onto a favourable 25-year iron-ore arrangement with Sishen Iron Ore Company (SIOC).

The main reason is that the benefits of the 2001 Iscor unbundling agreement – engineered primarily to ensure that ArcelorMittal South Africa retained an undivided 21,4% share of the Sishen mine, in the Northern Cape, to assure its vertical integration in the interests of retaining a competitive steel company – never actually flowed.

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In fact, the matter remains a sore point between the South African government and the JSE-listed steel company owing to the fact the favourable terms had been secured with the clear proviso that the company extend a so-called ‘developmental’ price to South African consumers.

However, that pricing promise never materialised, with the new owners of the steel company soon realising that government had no hard legal instrument to enforce what was essentially part of the spirit of the agreement, but whose implementation was left open to interpretation.

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Initially, the steel group, which is now about 46%-owned by the bigger ArcelorMittal Group, clung to its unpopular policy of pricing steel on an import-parity basis.

But, owing to concerted public pressure placed on the company by the Department of Trade and Industry (DTI), the company eventually made a unilateral decision to convert from import-parity pricing (IPP) to a new ‘benchmarked’ pricing model. It now sets domestic selling prices after an analysis of domestic selling prices in four markets (the US, Germany, Brazil and China) and then adjusting these to its expectations for the South African currency for the forthcoming month.

However, the DTI has never been comfort-able with the composition of the steel group’s ‘basket’, arguing too that there has been little noticeable difference between prices set under IPP and the benchmarked model.

In fact, the issue came to the fore during the 2006 Competition Tribunal hearings into South Africa’s first-ever complaint of ‘excessive pricing’, during which ArcelorMittal South Africa’s pricing was eventually found to be anticompetitive. The tribunal fined the group R692-million, but the case was eventually settled last year, after the Com-petition Appeal Court sent the ruling back to the tribunal for further deliberation.

In other words, a ‘trust deficit’ has developed between government and the country’s leading steel producer.

Nevertheless, the department continues to acknowledge that vertical integration is “theoretically” in the national interest, as it could ensure lower-cost production. This, in turn, could be used to the benefit of job- generating downstream steel consumers. But this can only occur if it is passed on by the steel company, rather than retained purely for the benefit of its shareholders.

It is this desire for competitively priced steel that Economic Development Minister Ebrahim Patel emphasised during the recent cluster briefings in Cape Town, when he described steel as a “key input into our economy” and added that “a lot depends on being able to achieve that in our indus- trialisation plans”.

The DTI is, thus, correctly concerned that the collapse of the iron-ore supply agreement could have implications for the newly announced second version of its industrial policy action plan, or Ipap2. Indeed, a number of steel consuming sectors have been highlighted for development under the plan, which Trade and Industry Minister Dr Rob Davies says has the potential to add 2,5-million direct and indirect jobs over the next decade.

Opportunity for the State
So what should government do? Well, I see this crisis, which was triggered by SIOC notifying ArcelorMittal South Africa that it had “cancelled” the Sishen supply contract from March 1, as a real opportunity for the State.

True, it is a commercial matter. True, there is a framework that governs the way disputes should be settled between the steel and the iron-ore company, which both parties insist will be expedited. But, surely, there is also sufficient room for government to seek to influence the outcome in the national interest. Alternatively, only narrow share-holder interests will be served.

Therefore, I propose that both the DTI and the Department of Mineral Resources (DMR) become active participants in seeking to ensure that the spirit of the 2001 unbundling agreement (which had the release of shareholder value as but one of its aims) is realised, albeit belatedly.

The DMR should assess whether Kumba Iron Ore (KIO) is correct in its assertion that ArcelorMittal South Africa has forfeited its mineral rights at Sishen owing to the fact that it did not move to covert these rights from the old to the new order. If they concur, then surely they become owners of those rights.

Should that be the case, then there are a couple of options. Either the State could use it as a tool for further black economic empowerment into the iron-ore sector – this would be the easiest solution, but would do nothing to ensure that the benefits were spread beyond a narrow base of shareholders.

Alternatively, it could work with the DTI to make the 6,25-million tons of iron-ore available on a cost-plus-3% basis to any steel producer willing to beneficiate the material locally (or within the region) on the proviso that the production is sold at truly ‘competitive’ prices.

Naturally, this is not the outcome KIO, an Anglo American subsidiary, wants. But neither is it a dripping roast for Arcelor- Mittal South Africa, which might be able to sustain its access to favourable iron-ore prices, but which would be forced to pass a good deal of those benefits through to its customers.

If ArcelorMittal South Africa is correct, and the deal remains binding, government could still use it as an opportunity to remind the steel group that it remains outside the spirit of the unbundling agreement and use its moral suasion to put pressure on it to come into line.

In other words, government should seize the initiative and move the debate away from the domain of shareholder value and into the realm of national development.

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