NEWS ANALYSIS: New steel pricing policy caps Arcelor earnings
ArcelorMittal SA’s new CEO, Wim de Klerk, says the company’s new pricing policy for sales of flat steel products, agreed with the government, does not have precedent elsewhere in the world.
"Not as far as we are aware. These pricing principles were developed in consultation with government in the best interest of the local steel industry," he says.
This comes as SA’s largest steel maker has finally acquiesced to long-standing government demands for regulated pricing and, therefore, a cap on earnings, amid a crisis in both the global and domestic steel industries.
"This is the intended effect of the pricing principles," De Klerk told Business Day. "Pricing based on an import-weighted basket and a cap on ArcelorMittal SA’s earnings will assist in ensuring that competitive pricing can be passed on to the downstream industry."
ArcelorMittal SA has agreed to this as part of a holistic solution for the sustainability of the industry, and which will contribute to economic growth, says De Klerk. "We await final approval of the pricing principles from government."
Despite the seeming warm sentiments, the about-turn by the company comes after agreeing to pay a R1.5bn fine for anticompetitive practices. Amid state pressure, ArcelorMittalSA has also undertaken to invest R4.6bn to increase efficiencies.
This new pricing policy has been welcomed by the downstream metals industry in SA, and by the official opposition DA.
"This is a progressive step in allowing for small business to compete in the sector and create jobs, where previously collusion and a cartel had compelled small steel businesses to shut doors and retrench workers," the DA says.
ArcelorMittal SA has undertaken to limit for a period of five years its earnings before interest and tax margin to a cap of 10% for flat steel products sold in SA.
However, it is not all a one-way street for the government. De Klerk says "holistic discussions about what is needed in these challenging times to preserve the industry" include the state providing its support for the designation of primary steel produced in SA for state infrastructure development projects, and settlement of competition issues.
Of six matters pending before the Competition Commission, the company has admitted guilt in respect of two — in long steel, relating to allegations of price-fixing, allocating customers and sharing commercially sensitive information; and in scrap metal, relating to allegations of price fixing by the company as a consumer of scrap.
The company says it has made no admission of guilt regarding an "excessive pricing complaint" against flat steel products, and that the Competition Commission has also made no finding in this regard. To this end, the supposed peace deal it has made with government involves several other factors.
"The objective of the pricing principles is to ensure that once the steel industry recovers from its current challenges, the benefits of having a local primary steel manufacturer will result in benefits for the downstream industry and the economy generally," De Klerk says.
"This means a price for steel into the future that allows ArcelorMittal SA to earn a reasonable margin from domestic sales, while being competitive and efficient — a fair price — while at the same time promoting benefits for the downstream industry."
De Klerk wrote last week in this newspaper that there was "scepticism within some sections of the government" about whether ArcelorMittal SA should receive protection from imports of Chinese-made steel.
He said then that "to some extent, legacy issues had clouded our relations with the government in recent years", and that the process of negotiations with the state had "certainly re-emphasised for the company how important it is to have good relations with our stakeholders — and in this case, the government is both a regulator and a consumer of our product in state infrastructure projects".
But while the government has imposed standard tariffs on imported steel, amid a global steel crisis and glut of product, it still has not implemented much more stringent safeguard remedies on steel imports that ArcelorMittal SA had asked for.
The pricing deal also comes as SA’s largest steel maker is still negotiating a long-delayed black economic empowerment deal. News on this is imminent. This follows an attempt by Gupta-related interests some years ago to take a R9bn "empowerment" stake in the company through an entity called Imperial Crown Trading.
After long and bitter court sagas, the deal was ultimately dismissed by the Constitutional Court in 2013. Had it succeeded, it would be so far underwater now as to likely be irredeemable. ArcelorMittal SA’s total market capitalisation now is barely R9bn, and not so long ago, was half that.
The eventual capitulation on pricing by ArcelorMittal SA comes amid renewed uncertainty around the probity of Gupta-related companies and their dealings with the government.