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AMSA’s R1.5bn competition settlement part of bigger image makeover to win steel protection

Source: Creamer Media's Engineering News Date: 18 February 2016

Steel producer ArcelorMittal South Africa (AMSA) has made a R1.5-billion proposal to the Competition Commission to settle all outstanding matters against the company – if approved, it would be the largest competition-related fine ever paid by a single South African entity.

Departing CEO Paul O’Flaherty, who handed over the reins on February 12 to acting CEO Dean Subramanian ahead of the imminent appointment of a permanent replacement, said a provision of R1.25-billion had been made for the settlement as part of once-off provisions of R2.6-billion for 2015.

Together with impairments of R6.8-billion, the once-off write-downs contributed materially to the group’s massive year-end loss of R8.6-billion, which was 54 times worse than the loss of R158-million reported in 2014.

Subramanian stressed that the agreement with the commission was for the settlement payments to be liquidated over a period of five years, which would probably translate into a cash-flow impact of around R300-million in 2016.

However, the commission still needed to recommend the offer to the Competition Tribunal, which had authority to approve or disallow the settlement.

Should the fine be implemented as envisaged, it would dwarf previous single-company administrative penalties, with Pioneer Foods having paid R1-billion to settle seven competition breaches, including for its role in the bread cartel.

In 2013, construction firms concluded settlement agreements, collectively valued at R1.46-billion, with Murray & Roberts paying R309-million of that amount.

AMSA itself was fined R692-million in September 2007 for excessively pricing flat steel, but it appealed that case and eventually settled with the complainants, Harmony Gold and DRDGold. Sasol, likewise, was fined R534-million in 2014 for having charged excessive polymer prices, but the fine was set aside on appeal.

The settlement formed part of what O’Flaherty dubbed a “journey”, initiated in August 2014, to improve the company’s tattered relations with government, whose assistance was required to stave off unfair import competition from China. Without making progress on several outstanding competition cases, AMSA could not “get through the door” with government.

MORE PROTECTION GRANTED

Since then “tough, tiring, frustrating, but ultimately rewarding” progress had been made, with AMSA having secured 10% protection in eight of the ten product categories on which it made application to the International Trade Administration of South Africa (Itac).

Protection was granted on galvanised and colour-coated steel in December, and in February, Itac Gazetted notice of 10% protection on bar and wire rod, as well as plate, cold-rolled coil, sections, and semi-finished products such as slabs, blooms and billets. A determination was expected soon on hot-rolled coil (HRC) and other bars and rods.

O’Flaherty lamented the fact that it had not applied first for protection on HRC, noting that HRC was 38% of its overall sales and 50% of Vanderbijlpark’s sales. In 2015, 550 000 t of the 1.2-million tons imported into South Africa was HRC.

But AMSA was also pursuing five safeguard-duty applications, which, if successful, would impose far higher protection levels over and above the 10% duties already secured. Itac was yet to make a final determination and AMSA would not be drawn on the level of protection being sought.

But the company dismissed any correlation between the protection already granted and recent increases in domestic steel prices, arguing that the January adjustments were the result of a $10/t rise in the international steel basket price and a fall in the value of the rand against the US dollar.

O’Flaherty also insisted that AMSA was “ready to sign” a fair pricing agreement with government, which would regulate the domestic price of flat steel in a bid to protect downstream consumers in return for the higher levels of upstream protection.

He stressed, though, that the new model would still be linked to a dollar basket, which meant that prices would continue to adjust to changes in international steel prices and the exchange rate.

“We are pretty close to signing a deal with government and being regulated on flat-steel prices.

“It’s a win-win, but it’s a lot of pain for everybody . . . that’s the compromise we have reached with government. We have to try and protect the downstream and the upstream and we will do that by having a price that is competitive and fair and we will be regulated on it.”

Steel producer ArcelorMittal South Africa (AMSA) has made a R1.5-billion proposal to the Competition Commission to settle all outstanding matters against the company – if approved, it would be the largest competition-related fine ever paid by a single South African entity.

Departing CEO Paul O’Flaherty, who handed over the reins on February 12 to acting CEO Dean Subramanian ahead of the imminent appointment of a permanent replacement, said a provision of R1.25-billion had been made for the settlement as part of once-off provisions of R2.6-billion for 2015.

Together with impairments of R6.8-billion, the once-off write-downs contributed materially to the group’s massive year-end loss of R8.6-billion, which was 54 times worse than the loss of R158-million reported in 2014.

Subramanian stressed that the agreement with the commission was for the settlement payments to be liquidated over a period of five years, which would probably translate into a cash-flow impact of around R300-million in 2016.

However, the commission still needed to recommend the offer to the Competition Tribunal, which had authority to approve or disallow the settlement.

Should the fine be implemented as envisaged, it would dwarf previous single-company administrative penalties, with Pioneer Foods having paid R1-billion to settle seven competition breaches, including for its role in the bread cartel.

In 2013, construction firms concluded settlement agreements, collectively valued at R1.46-billion, with Murray & Roberts paying R309-million of that amount.

AMSA itself was fined R692-million in September 2007 for excessively pricing flat steel, but it appealed that case and eventually settled with the complainants, Harmony Gold and DRDGold. Sasol, likewise, was fined R534-million in 2014 for having charged excessive polymer prices, but the fine was set aside on appeal.

The settlement formed part of what O’Flaherty dubbed a “journey”, initiated in August 2014, to improve the company’s tattered relations with government, whose assistance was required to stave off unfair import competition from China. Without making progress on several outstanding competition cases, AMSA could not “get through the door” with government.

MORE PROTECTION GRANTED

Since then “tough, tiring, frustrating, but ultimately rewarding” progress had been made, with AMSA having secured 10% protection in eight of the ten product categories on which it made application to the International Trade Administration of South Africa (Itac).

Protection was granted on galvanised and colour-coated steel in December, and in February, Itac Gazetted notice of 10% protection on bar and wire rod, as well as plate, cold-rolled coil, sections, and semi-finished products such as slabs, blooms and billets. A determination was expected soon on hot-rolled coil (HRC) and other bars and rods.

O’Flaherty lamented the fact that it had not applied first for protection on HRC, noting that HRC was 38% of its overall sales and 50% of Vanderbijlpark’s sales. In 2015, 550 000 t of the 1.2-million tons imported into South Africa was HRC.

But AMSA was also pursuing five safeguard-duty applications, which, if successful, would impose far higher protection levels over and above the 10% duties already secured. Itac was yet to make a final determination and AMSA would not be drawn on the level of protection being sought.

But the company dismissed any correlation between the protection already granted and recent increases in domestic steel prices, arguing that the January adjustments were the result of a $10/t rise in the international steel basket price and a fall in the value of the rand against the US dollar.

O’Flaherty also insisted that AMSA was “ready to sign” a fair pricing agreement with government, which would regulate the domestic price of flat steel in a bid to protect downstream consumers in return for the higher levels of upstream protection.

He stressed, though, that the new model would still be linked to a dollar basket, which meant that prices would continue to adjust to changes in international steel prices and the exchange rate.

“We are pretty close to signing a deal with government and being regulated on flat-steel prices.

“It’s a win-win, but it’s a lot of pain for everybody . . . that’s the compromise we have reached with government. We have to try and protect the downstream and the upstream and we will do that by having a price that is competitive and fair and we will be regulated on it.”

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