State wants Mittal price probe

Johannesburg - The trade and industry department will refer ArcelorMittal SA to the Competition Commission after the steel company announced on Tuesday it was increasing its prices.

It wanted the commission to investigate ArcelorMittal SA for "abuse of dominance and excessive pricing", the DTI said in a statement on Tuesday.

The steel giant intended implementing a R600 surcharge following its dispute with Kumba Iron Ore over the Sishen mine.

ArcelorMittal said this would partially mitigate the additional iron ore cost, based upon the international spot price for iron ore that Kumba-owned Sishen Iron Ore Company (SIOC) said it was entitled to charge on iron ore supplied to ArcelorMittal.

The department was "very concerned" about the impact the increase in steel prices would have on manufacturing cost competitiveness.

The dispute had resulted from ArcelorMittal SA not renewing its mining rights for 21.4% of the Sishen mine by a government deadline of May 2009.

"The failure by ArcelorMittal SA to convert its old mining order rights appears to have been a serious error of judgement on the company's part, for which it now wishes to penalise the entire South African economy by passing the full costs of the new iron ore price on to domestic steel consumers,' the department said.

Since May 2004, it had been in protracted negotiations with ArcelorMittal SA to give effect to the company's commitment, made during its merger with Iscor, to develop a pricing model that would raise production of value-added products both for the domestic and export markets.

"Towards the end of 2005, while negotiations were continuing with the department, ArcelorMittal SA unilaterally decided to end its import parity pricing system and announced a basket pricing model based on domestic price benchmarks in a number of countries."

The implementation of this new pricing model apparently began in early 2006, the DTI said.

"The model is based on an unweighted average of at least four constant countries: USA, Germany, China and Russia supplemented from time to time by other pricing data from, for example, India and Brazil."

The DTI said the choice of countries was not based on any logical rationale such as import competition for value-added products or production costs advantage.

"Over recent months, in particular from July 2009 to date, it has become apparent that ArcelorMittal SA's domestic... prices are much higher than domestic prices in major global regions, even compared to high-cost producing countries such as North America and EU."

The DTI said it had questioned whether ArcelorMittal SA was indeed implementing and following the benchmarking method it announced in 2005.

"It is very surprising that today ArcelorMittal SA wants to link its steel pricing to costs of inputs, while in the past, when the company was enjoying the benefits of the cost plus 3% [price] for iron ore, it has stated that the landing price of steel is not linked to any costs but to market dynamics."

At no point had ArcelorMittal SA agreed on a "cost-plus" pricing system for primary steel to pass on the substantial benefits the company had been receiving under the Kumba agreement to the domestic steel consuming industries.

"The department believes that the iron ore surcharge proposed as a result of the iron ore price moving from the cost plus 3% to anything close to the spot price of about $120 per tonne will result in excessive pricing in the domestic market.

In addition, the DTI said the domestic steel price was already linked to international prices which were also rising due to higher input costs. Therefore there could be some levels of double-counting if the base price was not adjusted accordingly.

- Sapa