Steel Industry: inputs from ITAC, Competition Commission & Industrial Development Corporation

Meeting report

Steel industry issues

International Trade Administration Commission (ITAC) briefing

Mr Siyabulela Tsengiwe, Chief Executive Officer, ITAC, said that since 2008/9, South Africa had experienced tough global economic conditions. This had resulted in an oversupply of steel in China, with a consequent drop in global steel prices, which had impacted on local steel manufacturers. ITAC had, in 2015, conducted ten investigations to increase tariffs to 10%, based on applications by ArcelorMittal South Africa (AMSA) and Evraz Highveld Steel and Vanadium. In August 2016, ITAC self-initiated another investigation to look at a possible increase in tariffs on a number of downstream products. The guiding principles through both investigations were to ensure economic viability, sustainable production, investment and jobs in the whole steel industry value chain, both upstream and downstream. This, however, was a challenging task.

Mr Tsengiwe spoke to the duties that were imposed and the conditions that accompanied the tariffs (see attached presentation). He said concerns had been raised by downstream manufacturers and ITAC was considering some rebates. ITAC had not yet made a determination on some recent price increases and a report by the Steel Committee would be issued in October.

He then spoke to the Downstream Tariff Review and to Safeguards as a trade remedy, which ITAC had decided not to impose as a provisional measure. ITAC hoped to make a determination on hot rolled steel within a few months and on cold rolled steel afterwards.

Competition Commission briefing

Mr Hardin Ratshisusu, Acting Deputy Chief Commissioner, Competition Commission, spoke to the legislative mandate of the Commission and the other competition institutions, before briefing the Committee on the AMSA settlement. He set out the main reasons why the Commission had focussed on the steel industry, noting that steel had been identified as a priority sector because it was an essential input that would ensure the success and sustainability of many strategic and key sectors of the economy. He looked at the history of AMSA痴 pricing of flat steel, as well as flat steel imports into South Africa (see presentation for more details).  AMSA dominated the domestic steel industry in both the flat and long steel markets.

He noted that downstream beneficiation was important for widening South Africa痴 manufacturing base. He then looked at collusion cases involving AMSA. Eventually, AMSA and the Competition Commission had reached a settlement and the key terms of this were:

• AMSA had agreed to a fine of R1.5 billion, payable over five years, in five annual instalments of not less that R300 million, plus interest after 18 months.
• AMSA admitted that it engaged in collusion with CISCO, SCAW and Cape Gate by fixing prices and discounts, allocating customers and sharing commercially sensitive information in the market for the manufacture of long steel products.
• AMSA admitted that it fixed the purchased price of scrap metal with Columbus Steel, Cape Gate and Scaw.
• AMSA agreed that for a period of five years, it would not be permitted to earn an EBIT (earnings before tax and interest) margin percentage greater than 10% on flat steel products sold in South Africa as measured over a 12 month period linked to AMSA痴 financial year. 
• The 10% EBIT cap was subject to variation up to a maximum of 15%, if the difference between the raw material basket cost and the basket price exceeds or was forecast to exceed USD350/t for a period of at least three months.
• AMSA had committed an additional capital expenditure of R4.5 billion over five years, subject to this being feasible and affordable.

He said the settlement agreement was an important milestone in the Commission痴 fight against cartels. The pricing remedy was a safeguard mechanism to constrain AMSA痴 exercise of its pricing power in order to protect the downstream industries.

He then looked at other interventions by the Competition Commission into other aspects of the steel industry, which involved the Downstream Rebar Cartel, the Reinforcing Mesh Cartel, the Mining Roof Bolts Cartel and the Wire and Wire Products Cartel.  The Commission would continue to monitor AMSA痴 pricing policy and compliance with the 10% EBIT margin cap and the impact of the pricing remedy on the downstream industries. It would finalise the prosecution of the remaining respondents in the long steel cartel, flat steel cartel and the scrap metal cartel.

Industrial Development Corporation (IDC) briefing

Mr Maziwe Tunyiswa, Head: SBU Metals, IDC, spoke to the IDC's investment in steel production facilities. In 2015, the IDC had changed its investment focus from investment in industrial sectors to a focus on value chains in mining and chemicals. He then spoke to how steel was made and the steel value chain, noting that IDC had analysed the value chain in steel and had looked at how it could be made more competitive. He described the basic and primary steel processing (see attached presentation) and the IDC's exposure in various steel companies. The IDC had a 74% stake (R5b) in SCAW, a 50% stake (R7b) in Duferco and a 24% stake in Columbus. He said that the IDC had learnt a lesson from India which had introduced mini steel mills using induction furnaces, and Duferco and Columbus were examples of these. He then addressed some issues related to IDC's stake in SCAW.

Discussion

Mr P Atkinson (DA) asked what the IDC strategy was for its steel holdings, given the effect of SCAW's losses on the IDC's results.

Mr S Tleane (ANC) said AMSA was not admitting to a contravention of the Act in the agreement that had been reached, and enquired what were the implications of this. He also asked what was the impact of protecting AMSA through tariff increases, given the transformation programme of the government.

Mr Tleane asked IDC to explain its long term strategy in dealing with AMSA, given its long history of contravening regulations.

Dr J Cardo (DA) said that AMSA had admitted collusion with SCAW, and so he enquired what follow up had been done in the case of SCAW? The agreement with AMSA had a number of conditions which AMSA had to meet, such as no retrenchments, yet AMSA had recently talked about looking at retrenching 2 000 workers at Saldanha Steel, and so he asked if ITAC had followed up on this. He further asked what plans were there for Foskor, which was also a big loss maker for the IDC.

Ms C Matsimbi (ANC) asked ITAC what lessons it had learnt from the investigations, and its future plans to address the steel challenges and to secure jobs. What was the impact and implications of protecting the industry? She asked the IDC whether it had a plan for companies found guilty of collusion. She also asked the ITAC how it would deal with companies in which the IDC had a shareholding? She asked the Competition Commission what plan it had to implement the conditions of the AMSA ruling.

The Chairperson asked whether the agencies were fully capable of dealing with the issues, and whether the impact would be lower if there was more human capacity at the agencies? She wanted to know if investigations were taking place at the normal rate, and if there had been cooperation amongst the investigating agencies.

The Chairperson asked what the IDC was doing to protect its name, given that it had stakes in various companies involved in practising uncompetitive acts? What was meant by 'reviving Highveld Steel’? She asked the Department of Economic Development (EDD) also to comment on what measures it had taken to ensure the speedy resolution of the challenges.

Mr Tsengiwe responded to the question on the impact of protecting AMSA, saying that ITAC’s aim was to ensure AMSA was economically viable and sustainable. At the moment, it was making losses, and this was caused by the low priced imports that were affecting AMSA’s viability. He said there were competitiveness challenges because tariffs alone would not solve the problem.

The Chairperson asked whether it was a fact that AMSA was making losses.

Mr Ratshisusu said the Competition Commission had spent time analysing the financial information of AMSA and the Competition Commission thought that in fact the losses were real. AMSA could not compete with the imports from China. Even with the 10% tariff ,it would still find it difficult to meet the challenge.

Mr Tunyiswa said the AMSA plants were old and their technology was not up to date, so that AMSA could not compete. There was a 500m tonne surplus in steel production in China, which it could dump at any price. Overall, South Africa needed to address the modernisation and efficiency of all steel plants, and this was a long term goal. Another issue was that South Africa had to import coking coal as an input for steel manufacture. The IDC had been reducing its shareholding in AMSA because of AMSA's uncompetitive behaviour.

Mr Mohammed Vawda, Acting Deputy Director General: Policy, Department of Economic Development, agreed that this was a complex challenge. He pointed out that other countries like America could impose tariffs to protect their downstream industries but South Africa could not. He said the R4.6 billion, which was something separate from the fine of R1.5 billion, was for the refurbishment of the plant to make it more efficient. AMSA’s EBIT margins were being limited so that it could not make a profit of more than 10%; he pointed out that a 10% return was “very ordinary”. He confirmed that in the previous financial year AMSA had made an audited loss of R8.6 billion as a result of China's dumping of steel. Prior to that AMSA had made significant profits, which sparked off the Competition Commission process, which led to a fine when it had found collusion. Tariffs had been dropped, but then the global market glut led to imports from China at prices which were much lower than AMSA's. AMSA had now reached the stage where AMSA either died or was protected. If AMSA was left on its own, it would die. However, South Africa did not have the capacity to transport all its required steel from coastal ports. On some products where South Africa did not have capacity, imported steel products were not even sold at below-market prices. It was therefore vital to build local capacity. The criticisms of the Committee were valid but all the competing interests needed to be balanced to keep the industry alive.

He pointed out that the negotiations with AMSA took a long time, because AMSA was not cooperating with the authorities. The removal of import tariffs had forced AMSA into a negotiating position, but this had taken some time. He said he did not know if the R4.6 billion was sufficient to turn the plant around into a modern one, as AMSA's plant was 60 years old.

Mr Tsengiwe spoke to the questions on the number of price increases and retrenchments by AMSA. A report was being drawn up by the Steel Committee and this was still a work in progress. ITAC would receive a report from the Steel Committee in the following month and then ITAC would make a determination. As far as he knew, there had been no retrenchments at Saldanha Steel since the imposition of the tariffs.

In regard to lessons learnt, he said duties had been imposed to protect domestic steel manufacturing and to retain jobs. At the same time ITAC was mindful of the impact on downstream industries and had taken measures to mitigate this impact. ITAC was working on safeguards for hot and cold rolled steel, but it did need to look into whether this would be in the public interest. There had been hearings for hot rolled steel, and in two months time ITAC would make a determination. He repeated that tariffs alone would not solve the problem, so that other measures to improve industry competitiveness were also required.

Mr Tunyiswa spoke to the issues on SCAW, noting that SCAW had been making losses for a while and they were in the process of selling a part of the stake to strategic equity partners, whom they believed would be able to turn some SCAW divisions around. IDC had also been reducing its shareholding in AMSA over the years to its current level of below 9% and this was informed by IDC's decision to form a competing company. That strategy was now under review, given AMSA's recent decisions and the modernising of its plant. IDC had no holding in Highveld Steel.

He said that one of the lessons IDC had learnt was that it was not in a position to manage companies with excellence, and therefore needed strategic partners with the necessary expertise.

He added there was more than R1b in legacy environmental liabilities in Highveld Steel and this was something the Committee could assist with. The past experience was that money was put into saving companies, but none of the partners were willing to pay for the legacy issues and government had to take that burden or somehow the shareholders of Highveld Steel had to pay that money. There was also the potential legacy issue fine from the Competition Commission. Currently IDC was working with AMSA in a joint venture to resuscitate a structural mill on a temporary basis, until a solution was found for Highveld Steel. The plant should be open by the end of the year. There were, however, continuing concerns over environmental liabilities and the IDC and others were engaging with the Department of Environmental Affairs.
IDC was also looking at re- opening a mine to supply ore and vanadium through a purchase from the liquidator.

More than R2b was approved, to revive Foskor. The IDC was also looking at alternative input suppliers and believed there would be a turnaround at Foskor.

Mr Tunyiswa said the question around companies found guilty of collusion was a very delicate matter because some of the cases were very old. IDC had engaged with management to try and change these companies' behaviour through IDC’s presence on the board, or in some cases because IDC was in full control. There was a standard policy applied where a company was fined for having engaged in these uncompetitive practices, which was to ascertain whether the company had changed before giving any further funding to the company. If fines had not been paid, the application to IDC was rejected.

The IDC did cooperate with the Department of Trade and Industry (dti) and ITAC.

Mr Tleane said the R4.6b was not going to the downstream businesses, but was a commitment to refurbish its own operation, and therefore this settlement “was a damp squib”. He asked what chances AMSA would have of raising the R4.6b in the current trading conditions? He noted that the fact that the R1.5b penalty was to be paid over a lengthy period of time, and this did not also generate confidence in the company. He asked that since China was a BRICS partner, it would make sense if the government could engage with China.

Dr Cardo asked if AMSA was asking for an additional 30% tariff protection, and questioned whether this was what ITAC had referred to in the presentation, He also wondered when ITAC would foresee an announcement being made on this?

The Chairperson referred to the amount of R4.6b, and asked how long it would take AMSA to refurbish, and how much of the R4.6b AMSA would spend annually. The Committee were just as concerned with other industries. She demanded that the agencies should improve what was being done, because she was not convinced that they were doing their best.

Mr Tunyiswa said complex questions had been asked. There was a need to look at upstream and downstream areas simultaneously. It was possible to have a competitive downstream by relying solely on imports but the upstream provided a great deal of employment. Were AMSA not to survive, he predicted that some cities, like Middelburg and Vanderbijl Park, would die alongside the company. He also added that because South Africa had no capacity to provide competition to China, it was not pricing its steel low to become competitive.

Mr Tsengiwe said ITAC was doing work to support downstream industry, while at the same time trying not to adversely affect the upstream areas. It had introduced some interim measures which allowed it to protect and improve the current steel manufacturing capacity, which would reduce South Africa's exposure to dumping. ITAC was doing the best it could within the current circumstances, but  this would be a long term problem for South Africa.

Mr Vawda explained that the R4.6b was being used for refurbishment to make AMSA more efficient. The Department had limited AMSA’s profits to 10%. Speaking to the question on BRICS, he noted that the EDD had done something similar in the negotiations to what the dti had done to try to protect the textile industry. China was itself trying to protect jobs.

Mr Tsengiwe said he would not characterise the future as bleak, because the industry did go through cycles. Currently the cycle was at its bottom and he was cautiously optimistic that at some point global prices would pick up. He stressed that this was a global issue and the G20 meeting recently had made a resolution to establish a global forum to address the oversupply of steel from China.

There had been government bilateral meetings with China on the steel issue, including ITAC's engagements with its Chinese counterparts, who had suggested industry to industry interactions. ITAC had said it would explore both government and industry level avenues in parallel and would continue looking at safeguards.

Mr Tsengiwe confirmed that AMSA was indeed asking for an additional 30% tariff protection. He said the ITAC decision would be made in two months time for hot rolled steel, and in four months for cold rolled steel. He said he could not divulge what percentage number ITAC was considering.

Mr Ratshisusu agreed that the question on what regulators were doing about their mandate and AMSA was very important, because for 20 years there appeared to have been no change. Concentration levels were still very high, not just in steel and there were not sufficient safeguards for companies making undue profits. The Competition Commission instruments could address the problem, but the result would happen very late in the process. These were not legacy issues because they had arisen post 1998.

He said the private sector was absent from the discussions and some questions that had been asked should be directed to AMSA and other companies like SASOL.

Mr Bukhosibakhe Majenge, Legal Services Divisional Manager, Competition Commission, confirmed that AMSA had not made any admission of guilt. However, it was clear that it had engaged in excessive pricing and once the Competition Tribunal confirmed the Competition Commission's recommendations, the remedies became binding. There were some complex issues around the lack of any admission. The courts in the SASOL case were reluctant to intervene in pricing issues, and this made things rather difficult for the regulators. If there had been an admission of guilt, the implications of that would be that any injured party could claim damages from AMSA.

Mr Majenge spoke to the consequences for SCAW, Highveld Steel and Cape Gate. He said that SCAW had taken a commendable position and applied for conditional immunity, and by doing this it was protected from penalties. There were ongoing discussions between the Competition Commission and Business Rescue on Highveld Steel. The Cape Gate matter was not settled and the prosecution against this company would continue.

The Chairperson asked who was going to supply the refurbishment material.

Mr Vawda said the Minister had established a task team within ITAC which included representatives of dti, EDD, AMSA and other downstream steel users. AMSA had been told to refurbish its plant to provide products which the downstream users required, like hot rolled steel.

Mr Ratshisusu said the settlement agreement covered a number of elements that talked to development and to penalties. The investments AMSA had committed to would be made an order of the Tribunal. The Competition Commission would be monitoring compliance on this every year. AMSA had wanted to include rebates, but the Competition Commission had not touched rebates, and so it was possible to continue with the rebates to support downstream industries. The Competition Commission did not want to use rebates as a remedy, because in their experience this could be used to exclude competition. The rebates, however, when used, should not contravene the law. He said it was possible that the funds from penalties could be used to address those affected, but it would require interaction with the National Treasury.

He noted that it did not take long to do the investigations, but the prosecution part had been delayed because the companies challenged the Competition Commission at every step. The Competition Commission had signed a MoU with ITAC in August 2016 and also participated in ITAC hearings. It was possible for South Africa to better define its laws. He pointed out that the 10% fine had huge implications for the companies involved and the Competition Commission should be further capacitated. The Commission had also engaged with IDC.

The Chairperson said she was not satisfied that every string was being pulled, pointing out that government owned the IDC. There needed to be ongoing and high implementation and monitoring and greater cooperation amongst the agencies. She said there should not be an issue which dragged on for years and the market should not be allowed to twist and turn the government.

The meeting was adjourned