competition policy

ArcelorMittal settlement is new and tricky territory for competition authorities

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 Arcelor Mittal 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%  cap on its earnings before interest and tax 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.

Makhaya is the CEO of Makhaya Advisory.

This piece was published in Business Day (30 August 2016)

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