Competition Commission on Harmony-Mittal case; Seminal importance of competitively priced steel

Meeting report

Competition Commission Briefing
Mr Shan Ramburuth, Head of the Competition Commission, gave a short history of Iscor/AMSA before briefing the committee on the Harmony-Mittal case which had appeared before the Commission (see attached report). He said the change in ownership of Iscor when LNM had taken over had not attracted the attention of the Competition Commission as the change of ownership had not affected the structure of the market, with Iscor/LNM retaining its dominant 80% market share. The Department (DTI) had entered into a pricing agreement with LNM which sought to ensure competitively priced steel be made available for the local market and also to get LNM to increase its liquid steel capacity. The Competition Commission regarded a dominant producer to be one which had 45% of the market.

LNM Holdings (later ArcelorMittal South Africa - AMSA) was able to segment the market into domestic and export markets, charging the former import parity prices (IPP) and the latter export parity prices (EPP) through agreements with its export customers.

A complaint was lodged with the Commission which resulted in the Harmony-Mittal case. The results of this case were inconclusive as the matter was settled out of court by the parties involved. Prior to being settled, the Competition Tribunal heard the case and its decision was that Mittal was a super-dominant producer with no challengers in a market that had high barriers to entry and it was using its dominance to segment the market, to price its goods excessively and to give selective discounts when it felt threatened. Both parties put forward price comparisons but the Tribunal stopped short of, in effect, becoming a price regulator by not taking into account these arguments. The Tribunal found that Mittal had charged excessive prices to the detriment of consumers.

These findings were challenged by Mittal and it went to the Competition Appeals Court (CAC) where the Appeals Court set aside the Tribunals ruling on the grounds that no attempt had been made to asses the credibility of AMSA’s defence that it was not earning excessive profits. The Appeals Court agreed that AMSA’s dominance and conduct constituted prima facie evidence of excessive pricing. It would thus be necessary to establish the actual cost of production and its economic value in Rand, compare it and then make a value judgement. AMSA’s prices were on a par with those of high price countries yet its costs were substantially lower as it enjoyed low cost iron ore, cheap electricity and a high domestic price for steel products.

Recently AMSA had implemented a surcharge on its basket price to take into account the fact that it had to now pay a higher price for iron ore from Kumba, yet the basket price calculation already included the cost of iron ore at R142 (the international price) rather than the R35 (cost +3%) paid to Kumba. The Commission, he said, could not look into the surcharge as it was in place for too short a time to judge its effect. He said there were four steel cases currently with the Commission, two of which involved AMSA.

Discussion
Mr T Harris (DA) asked if the other producers matched the prices of AMSA. Were there things the State could do to lower the barriers to entry? Where did the basket price fit relative to the Independent Power Producer (IPP) and Electricity Pricing Policy (EPP)? What was being proposed to tackle the excessive pricing?

Ms C September (ANC) asked what was meant by economic value.

Mr B Radebe (ANC) said at issue was the looting of South Africa’s resources which was benefiting people outside the country. Why were the products not benefiting local manufacturers? He asked how long it took the Commission to finalise cases because if something harmed South Africans, it should be curbed. If the companies were not adhering to a contract, the company should be pursued.

Ms C Kotsi (COPE) asked why the cost plus 3% agreement was continuing when the country was not benefiting. She noted that even with the basket price, South Africa still suffered.

Mr N Gcwabaza (ANC) asked if AMSA was acting legally when it introduced the basket price.
If AMSA introduced excessive prices, was it passing its cost of production on to local consumers?

With regards to market structure, Mr Ramburuth said that there had been no competitive constraints on AMSA as it enjoyed 80% market share. With regard to the basket price, only the methodology of calculating a price had changed while the price basically remained the same. Academics could start a debate on what to regard as excessive pricing, although the United States of America did not believe in such a concept.

He said Mr Radebe’s point was taken. The Appeals Court had found that the Tribunal had applied a wrong legal test. When the case returned to the Tribunal, the complainants had reached an out of court settlement.
 
Mr Garth Strachan, Chief Director: Industrial Policy, the dti, said the unbundling occurred between two companies, leaving the State with limited leverage. The State had attempted to bring in other players.

Ms Thandi Pele, Chief Director: Metal Fabrication, Capital and Transport Equipment of the Industrial Development Division, the dti, said that there was also an attempt through the Industrial Development Corporation (IDC) to move away from traditional minerals to “new” minerals. She added that basket pricing had not had any significant impact on price.

Mr Radebe asked why AMSA was not pursued for breach of contract.

Ms C Kotsi (COPE) asked if exporters could resell their products domestically.

Mr Strachan said that the cost plus 3% agreement was not legally enforceable as it was a contract between two companies. The task force was looking at the Minerals Act and the Competitions Act and reporting back to the Minister and the Committee on what could be brought to bear to assist IPAP2.

Mr Ramburuth said that it was perceptive of Mr Gcwabaza to see the domestic customers as subsidising the international prices. Were the Competition Commission’s penalties high enough? Were they a sufficient deterrent? The alternative was that companies went out of business and that too was counter productive.

Mr S Njikelana (ANC) asked if the extra powers given to the Competition Commission were adequate enough to deal with AMSA

Mr A Alberts (FF+) asked how AMSA had extricated itself from its obligations.

Mr T Harris (DA) wanted to know about the other two issues dealt with by the Tribunal, that of the cost + 3% and the IPP price.

Mr Ramburuth said that the tribunal found AMSA to be “super dominant”, “uncontestable in an incontestable market”. The Appeals Court did not contest this and found that the Tribunal should have done the price calculations and determined the economic value of the product quantitatively and then assessed AMSA’s claims qualitatively.

AMSA’s ability to negotiate control over export sales agreements was indicative of the power it wielded. The Tribunal had sought to prevent AMSA from determining to whom its customers could and could not sell, which in practice would have caused the domestic and export market prices to coalesce.

Mr Strachan said that AMSA fell in the lowest quartile globally regarding production costs while its selling price fell in the highest quartile. This pricing was a challenge for all domestic downstream industries.

Mr Ramburuth said that “people with deep pockets have more access to the courts. If respondents in competition cases believe they can delay the outcome by pursuing technical legal points, then they will". Furthermore, the Commission had just lost a case in the Supreme Court of Appeal against the milk cartel, on a legal point and suggested that the Committee read that judgment to see how the courts viewed the manner in which the Commission operated.

Dr Paul Jourdan’s briefing on the importance of competitively priced steel
Dr Paul Jourdan, a consultant on integrated development, said a country’s natural resources had to flow downstream where most job creation occurred. A developmental state had to ensure that the supply of critical feedstock in the manufacturing process was made available at competitive prices or even take outright control of the feedstock.

Historically, he said the local market had operated behind high entry barriers and had enjoyed monopoly pricing for about 100 years. The South African market could not just be opened; it had to deal with the structures that had operated as a monopoly previously within that market. Steel and polymers were two products that had enjoyed monopoly pricing in the past.

The importance of steel could be gauged from the fact that steel production was ten times the production of all other metals combined, and that the only commodity bigger than steel was oil.

He argued that the steel industry had seen three phases. The Glorious West 30 phase, when steel production continually rose and the Ugly 20 phase, when steel production slumped. The current Far Eastern phase, spurred by the growth of China and India, was in his view a new opportunity for a long boom phase in the steel industry which South Africa could use to kick-start its industrial economy.

He said South Africa was well endowed with critical feedstock supplies of iron ore, coal, base metals and  ferro-alloys yet these metals were being sold at predatory monopoly prices which severely impacted downstream job creation and his guesstimate was that 100 000 jobs had been lost because of this.

He said these natural resources were finite assets and South Africa had to make the critical linkages, to use these finite assets to underpin growth in sustainable assets. These linkages were to put in place critical infrastructure such as transport and energy, to improve plant, machinery and equipment which would boost exports, to increase the downstream value-added beneficiation of products and to establish and support research and technology clusters which in South Africa was experiencing a general decline.

South Africa’s natural assets should be concessioned with strong linkage conditionalities attached as most trans-national companies made decisions based on its shareholder perspective not on the interests of South Africa. It was important that the feedstock be supplied at competitive or even utility prices.

He said the mining terrain should be divided into three areas, unknown areas, partially known areas, and known areas. With unknown areas, companies could be levied with a secondary tax based on the rate of return. Known areas could be put up for auction to establish a market price while geoscience surveys could be conducted on partially known areas.

He said the State should cancel certain licences as the loss to the economy was far greater than any compensation to be paid to the firms involved. The task team of the Department should enter into negotiations with AMSA to ensure competitive pricing in the domestic market. Should it not do so, the case should not go to the Competition Commission. Rather, their licences should be withdrawn and be put up for auction. This could be bundled with other resources into an attractive deal.

The Government needed to consider placing a competitive pricing condition into every new mineral licence as well as applied retroactively to all mineral licences.

Discussion
Mr A Alberts (FF+) asked Dr Jourdan if his proposals were unique and whether they would work.

Mr B Turok (ANC) quoted Simon Roberts as having said that there were many possible interventions. What legitimate and acceptable interventions could the Department and Government make?

Mr T Harris (DA) asked how involved the State could be and said that South Africa should look to the African continent as a natural market to expand into.

Mr Jourdan said South Africa should invest in the linkages and in upstream opportunities. South Africa did not have a strong research and development sector. The most important thing Finland had done was to invest in engineers to promote research and development and human resource development.

He said the free market principle was used for every other State asset except minerals. The State could introduce an export tax as this was WTO legitimate. The State could impose a royalties tax on exports which would progressively decrease as the product was beneficiated.

He said that there could be a tax on profitability rather than profit such as in the gold mining industry where profit over turnover was multiplied by a constant. A resource rent tax could be levied which was linked to the long bond rate. He recommended that it be triggered at the long bond rate plus 5 %.

He said minerals were State assets and the State was under obligation to be proactive with these finite assets.

He said that only through a customs union could the State expand the South Africa market on the African continent. Angola, for example, was getting most of its imports from Brazil even though South Africa was closer.

Outstanding Minutes
The minutes for the meetings on 27 and 28 July, 11, 13, 18 and 25 August were all adopted.

The meeting was adjourned.