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Serious questions being asked about composition of ‘fair’ steel price basket

Source: Creamer Media's Engineering News Date: 03 June 2016

South African steel consumers are raising serious concerns about the composition of the steel-price basket being proposed by ArcelorMittal South Africa (AMSA) as a mechanism for regulating domestic flat-steel prices and are seeking urgent talks with government to air their anxieties ahead of any deal on the so-called “fair pricing” methodology.

Department of Trade and Industry (DTI) deputy director-general Garth Strachan has indicated that government is close to agreement with AMSA on the methodology and that its implementation will be monitored by a ‘steel committee’, comprising government officials and steel experts.

AMSA has indicated, meanwhile, that it has proposed a “basket” based on selling prices in a range of countries in Europe (50%), Asia (30%) and North America (20%), but excluding the low-priced countries such as China, Russia and Turkey.

The exclusions, however, have raised alarm among several steel-intensive companies, some of which have written to the Steel and Engineering Federation of Southern Africa to request that body set up an urgent meeting with DTI on the matter.

They argue that the composition of the basket favours AMSA, as the company’s steel is traditionally cheaper than in the countries included.

In other words, they claim the basket will ensure that domestic prices remain higher than would be the case if more low-priced jurisdictions were included. The critics argue that AMSA’s unilateral use of the basket since the beginning of 2016 has facilitated price hikes of 22% over the past four months.

AMSA counters that the price has remained below import-parity levels and that it has “left money on the table” by moderating the increases relative to what could have been the case had the full currency, steel price and input cost increases been included.

The opportunity to import, steel consumers add, has been seriously curtailed by the introduction of 10% tariff protection on ten steel categories, with AMSA seeking additional safeguard duties on several of those categories.

One major fabricator, who spoke on condition of anonymity, warns that the competitive position of South African steel fabricators is being jeopardised. He tells Engineering News Online that they recently lost out on a contract to supply a coal project in Limpopo to a Chinese competitor, largely as a result of uncompetitive steel costs.

“The downstream effect of this is that fabrication companies will be forced to retrench workers and in some cases close their doors,”

Another large steel market participant, who also spoke on condition of anonymity, tells Engineering News Online that, while he has no issue with the concept of a fair pricing agreement, the operative word is “fair”.

“A fair pricing agreement cannot exclude the largest steel exporting nations and remain fair in setting the basket of selling prices. Today, the largest steel exporting countries are China, Turkey, Ukraine, Russia and even Vietnam,” he says, adding that their exclusion would “make a mockery of any pricing basket”.

Equally, if Northern Europe, Japan, Taiwan and South Korea were included the basket would be skewed towards a higher-priced outcome. North America, he adds, should be excluded entirely as there is greater demand than supply for finished steel, leading to some of the highest prices in the world.

With regard to the proposed steel committee, consumers believe there should be an equal number of representatives from service centers, wholesalers, processors, steel producers, steel construction companies and the manufacturing industry.

Strachan has reported that the committee will comprise government officials as well as industry experts and, besides pricing, would also monitor the “other reciprocal conditions” agreed to by AMSA in return for protection. These relate to investment, production, maintenance and employment.

Southern African Institute of Steel Construction CEO Paolo Trinchero, who has been invited to participate in the steel committee, tells Engineering News Online that he hopes the body will be constituted before the fair-pricing model is finalised and Gazetted.

Industry associations and individual companies have been asked by government to provide input on the basket model and that feedback is likely to be given once the committee formally meets.

“It is going to be important that we work closely with government to finalise this important matter,” Trinchero says, adding that it is also important that the committee be as representative as possible.

South African steel consumers are raising serious concerns about the composition of the steel-price basket being proposed by ArcelorMittal South Africa (AMSA) as a mechanism for regulating domestic flat-steel prices and are seeking urgent talks with government to air their anxieties ahead of any deal on the so-called “fair pricing” methodology.

Department of Trade and Industry (DTI) deputy director-general Garth Strachan has indicated that government is close to agreement with AMSA on the methodology and that its implementation will be monitored by a ‘steel committee’, comprising government officials and steel experts.

AMSA has indicated, meanwhile, that it has proposed a “basket” based on selling prices in a range of countries in Europe (50%), Asia (30%) and North America (20%), but excluding the low-priced countries such as China, Russia and Turkey.

The exclusions, however, have raised alarm among several steel-intensive companies, some of which have written to the Steel and Engineering Federation of Southern Africa to request that body set up an urgent meeting with DTI on the matter.

They argue that the composition of the basket favours AMSA, as the company’s steel is traditionally cheaper than in the countries included.

In other words, they claim the basket will ensure that domestic prices remain higher than would be the case if more low-priced jurisdictions were included. The critics argue that AMSA’s unilateral use of the basket since the beginning of 2016 has facilitated price hikes of 22% over the past four months.

AMSA counters that the price has remained below import-parity levels and that it has “left money on the table” by moderating the increases relative to what could have been the case had the full currency, steel price and input cost increases been included.

The opportunity to import, steel consumers add, has been seriously curtailed by the introduction of 10% tariff protection on ten steel categories, with AMSA seeking additional safeguard duties on several of those categories.

One major fabricator, who spoke on condition of anonymity, warns that the competitive position of South African steel fabricators is being jeopardised. He tells Engineering News Online that they recently lost out on a contract to supply a coal project in Limpopo to a Chinese competitor, largely as a result of uncompetitive steel costs.

“The downstream effect of this is that fabrication companies will be forced to retrench workers and in some cases close their doors,”

Another large steel market participant, who also spoke on condition of anonymity, tells Engineering News Online that, while he has no issue with the concept of a fair pricing agreement, the operative word is “fair”.

“A fair pricing agreement cannot exclude the largest steel exporting nations and remain fair in setting the basket of selling prices. Today, the largest steel exporting countries are China, Turkey, Ukraine, Russia and even Vietnam,” he says, adding that their exclusion would “make a mockery of any pricing basket”.

Equally, if Northern Europe, Japan, Taiwan and South Korea were included the basket would be skewed towards a higher-priced outcome. North America, he adds, should be excluded entirely as there is greater demand than supply for finished steel, leading to some of the highest prices in the world.

With regard to the proposed steel committee, consumers believe there should be an equal number of representatives from service centers, wholesalers, processors, steel producers, steel construction companies and the manufacturing industry.

Strachan has reported that the committee will comprise government officials as well as industry experts and, besides pricing, would also monitor the “other reciprocal conditions” agreed to by AMSA in return for protection. These relate to investment, production, maintenance and employment.

Southern African Institute of Steel Construction CEO Paolo Trinchero, who has been invited to participate in the steel committee, tells Engineering News Online that he hopes the body will be constituted before the fair-pricing model is finalised and Gazetted.

Industry associations and individual companies have been asked by government to provide input on the basket model and that feedback is likely to be given once the committee formally meets.

“It is going to be important that we work closely with government to finalise this important matter,” Trinchero says, adding that it is also important that the committee be as representative as possible.

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