Steel Giant ArcelorMittal Agrees To Co-Operate With State

30 August 2016

It was a long-running battle that could no longer go on. The David in this story furiously hopped around Goliath, without much success, until the giant, for other reasons, ran out of steam.

For most of the post-apartheid era, the pricing of steel has been contentious. Steel is important to any economy with a sizeable manufacturing sector. Iscor, the predecessor to ArcelorMittal SA and a creature of the 1928 South African Iron and Steel Act, was a strategic link in the apartheid state’s industrialisation drive. But with privatisation in 1989, the accusation has long been that the company became at best indifferent, at worst hostile, to SA’s developmental agenda.

Repeated calls have been made for the company to adopt a pricing model that would ensure that downstream, steel-consuming industries thrive. Instead, for many years, the company stuck with import parity pricing, charging local manufacturers as if they were importing the steel from distant and expensive international markets. It has stood accused of breaching the competition laws through cartel arrangements with its competitors, and the abuse of its dominance through excessive and discriminatory pricing.

The first major complaint against ArcelorMittal SA was brought by mining companies Harmony Gold and DRDGold, which alleged that the steel maker was charging excessive prices for the steel inputs they used in mining. The Competition Tribunal argued that the local market structure and barriers to entry were such that ArcelorMittal SA was "an uncontested firm in an incontestable market". It also found that the company had engaged in excessive pricing. However, the Competition Appeal Court did not endorse how the tribunal reached this conclusion. The matter was sent back to the tribunal but the parties entered into a confidential settlement.

Although the case was brought by the private sector, the pricing issue has been a sore point for a government rightly concerned about high input costs. This illustrates why a "developmental state" has been so elusive in SA. The notion of the developmental state is not just about how the government acts in isolation, but more crucially, how it collaborates with the private sector to achieve goals that each party could not achieve alone, to the benefit of the economy.

Quite the contrary obtained here. The government has owned up to naivety in its approach to the steel industry, while ArcelorMittal SA has admitted to arrogance, and worse — collusion. In the settlement reached with the Competition Commission, the company admitted to conspiring with its competitors to fix prices and allocate customers. This would have undermined the competitiveness of downstream industries, with consequences for employment and growth.

The Department of Trade and Industry acknowledges that it failed to get the best out of ArcelorMittal’s takeover of Iscor. The pricing standoff dragged on for years, with the government apparently unable to use any policy levers to steer this national champion into contributing to long-term development. But finally a truce has been reached. The company will pay a R1.5bn fine. It has committed to capital investment to the value of R4.6bn.

The competition authorities are wading into new and tricky territory. Under the settlement, a cap has been imposed on ArcelorMittal SA’s profit margins on its products. The authorities now have to ensure the steel maker sticks to a 10% earnings before interest and tax margin cap on flat steel. ArcelorMittal SA can expect to benefit from tariff protection and preferential procurement of local steel in infrastructure projects.

This settlement suggests the company and the government may have finally found the path to a symbiotic future. This might serve as a useful illustration for other industries in which the public and private sector are at loggerheads to the detriment of the economy.


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