DTI RESPONSE TO IRON ORE,
STEEL AND STEEL PRODUCTS
VALUE CHAIN MATTERS
PORTFOLIO COMMITTEE OF TRADE & INDUSTRY
24 AUGUST 2010
1
The iron ore, steel and steel products
value chain
Source: DTI
2
The developmental gains of
downstream beneficiation
Value-added, employment and investment per ton of steel
along the iron ore, steel and steel products value chain
Iron Ore
Iron
Hot rolled Coil
Cold rolled Coil
Pipe and Tube
Structural Steel (ave. of
heavy and light)
Yellow Metals (ADT)
Selling price
per ton of
steel ($)
Employment Investment
per 1000 ton / Rm per job
annum steel
Stage
$180
$500
$585
$685
$960
$3000
0.17
R8.5 m
0.8
R7.3 m
20
30
R1.5 m
R0.5 m
1
2
3
3
3
4
$13700
150
R0.6 m
4
Source: DTI
3
Steel Industry Policy and Developments:
Apartheid era to 2000
• 1927: Government established Iscor
• Iscor treated as strategic for Apartheid
industrialisation process supported by cheap
electricity and extensive tariff protection
• 1989: Iscor privatised and listed but with significant
state shareholding via the IDC
• Substantial state support for the restructuring and
strengthening of SA Steel industry, especially in late
1990’s
– 1996-1999: Joint venture between Iscor and IDC
to build Saldhana plant (Iscor acquires full control
in 2002)
– S37E Tax Incentive
– S37 H Tax Incentive (Strategic Investment
Projects)
– Intervention with US Government to avert antidumping duties
4
Steel Industry Policy and Developments:
2001 – 2004
• 2001: Unbundling into Iron Ore Mining (Kumba) and
Steel Making (Iscor) with preservation of vertical
integration through cost plus 3% access to iron ore
• Unbundling of Iscor involved public developmental
obligations:
– To ensure the viability and cost-competitiveness
of local steel production, and
– To ensure a competitive steel pricing regime to
support the development and deepening of
value-added manufactured products in
downstream industries
• LNM introduced as international partner
– Business Assistance Agreement (BAA): LNM to
introduce efficiencies in exchange for generous
fees, and right to raise shareholding
• 2001 – 2004: LNM steadily raises shareholding in
Iscor
5
Steel Industry Policy and Developments:
2004 – 2009
•
•
•
•
2004: LNM seeks Competition Tribunal approval to
take majority shareholding
DTI and LNM agreement wherebye DTI supported
majority LNM shareholding on the basis that “as soon
as possible after attaining a majority shareholding”
LNM would:
– Conclude a steel pricing agreement with DTI that
would replace import parity (IPP) with a
sustainable, developmental pricing model that
would raise the volume of downstream steel
beneficiated in the SA economy for both the export
and domestic markets.
– Increase investment in liquid steel capacity, from
6mt/a to 9mt/a (including expansion of Saldanha
Steel capacity to 2mt/a from 1.2mt/a in 2004)
The agreement acknowledged that the prevailing
pricing system (import parity pricing) could not realise
these downstream development objectives
LNM  Ispat  Mittal  ArcelorMittal: ArcelorMittal
South Africa (AMSA)
6
Steel Industry Policy and Developments:
Import Parity Pricing – an Example
Hot rolled coil domestic and export prices
Import Parity Price US$/t
619
DOMESTIC
SALES
Export Price US$/t
Transport to Gauteng
$26.3
5% "Hassle Factor" / Local premium
$14.7
Offloading and admin cost: 2.78%
$45.0
Import duty: 5%
$45.0
Shipping Cost to Durban
$34.0
Wharfage,Commission and Delivery
N
O
T
I
O
N
A
L
C
O
S
T
S
A
C
T
U
A
L
C
O
S
T
S
480
EXPORT
SALES
Iscor ex-works Price US$/t
(Net Export Price)
$21.7
376
$6.0
Import Duties
$31.0
Shipping to Export Destination
$33.0
Transport from inland to Durban
0
Source: Iscor, 2004
7
Steel Industry Policy and Developments:
2004 – 2010
•
•
•
•
•
•
•
Extensive negotiations since 2004
DTI tabled two sets of proposals
– Export Parity Pricing
– Basket Price comprising:
• 50% match steel prices of major importers of metal
and machinery products into SA
• 50% average of countries in lowest quartile of global
pricing
AMSA rejected either an export parity or cost-linked pricing
model
2006: AMSA unilaterally introduced “International Basket
Price” system
2009: AMSA unilaterally departs from its “International Basket
Price” system
2009: AMSA fails to convert mineral rights
2010
– Commercial dispute between AMSA and KIO on supply
arrangement
– Contestation over access to mining right
– AMSA introduces “iron ore surcharge” (subsequently
subsumed into base steel price)
8
Cost Structures
Production Costs 2008 Q1: Hot Rolled Coil ($ per tonne)
700
600
$ per tonne
500
Vanderbijlpark
40/168
Saldanha
= 24th percentile
24/168
= 14th percentile
400
300
200
100
0
1
3
5
7
9
11
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
47
49
51
53
55
57
59
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
101 103 105
107 109 111 113 115 117 119 121 123 125
127 129 131 133 135 137 139 141 143 145 147
149 151 153 155 157 159 161 163 165 167
Source: MBR
9
Pricing
Hot Rolled Coil Prices (US$/Ton) 2004 – 2010
1000
900
870
840
800
726
684
700
632
615
618
599
600
534
546
559
2004
2005
2006
618
600
540
500
400
300
200
100
0
Arcelor Mittal South Africa (AMSA)
EU (Average)
Russia
South Korea
2007
USA
Germany
Japan
PR China
2008
2009
2010 (Jan-July)
Canada
World Average
Taiwan
Source: MEPS, MBR, AMSA, DTI
10
Performance of the SA
iron-ore industry
Iron ore sales: domestic and export 1990-2008, ‘000 tons
35000
30000
Volumes (000)
25000
20000
15000
10000
5000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
LOCAL SALES
EXPORT SALES
Source: DMR
11
Performance of the SA
Steel industry
Steel sales: domestic sales, exports, imports and embodied
in value-added exports, tons ‘000
9000
8000
7000
6000
Tons ('000)
5000
4000
3000
2000
1000
0
Primary Steel Exports
Primary Steel Imports
Domestic Sales
Domestic Sales for Value Added Exports
Source: SAISI and DTI estimates after 2008
12
Performance of the SA
Steel industry: Output
Output of basic iron and steel, metal products and
machinery sectors, 1990 – 2009, R’millions (2005)
Source: Quantec
13
Performance of the SA Steel
industry: Employment
Employment in basic iron and steel, metal products and
machinery sectors, 1990 – 2009
Source: Quantec
14
Performance of the SA Steel
industry: producer prices
Producer prices of basic iron and steel, metal products and
machinery sectors, 1995 – 2009 (1995=100)
425
400
375
350
325
300
275
250
225
200
175
150
125
100
1995
1996
1997
1998
1999
2000
Basic Iron and Steel
2001
2002
Metal Products
2003
2004
2005
2006
2007
2008
2009
Machinery and Equipment
Source:StatsSA
15
Importance of steel pricing to
downstream development
Direct and indirect proportion of steel as an input into metal
product and machinery sectors
Sector
Sub-sector
Metal products
Structural metal
products
32.0%
42.7%
Other fabricated
metal products
36.6%
42.2%
Treated metal
products
35.8%
40.9%
General
machinery
19.3%
24.9%
Mining machinery
18.8%
24.4%
Food machinery
18.4%
23.4%
Machinery and
Equipment
% Direct inputs
% Direct inputs
+ Indirect inputs
Source:StatsSA
16
Importance of steel pricing to
downstream development
Estimated output and employment responsiveness of
downstream steel firms to reductions in the domestic price
of steel
% reduction in the
domestic price of
steel
% of firms that would
increase output by
more than 10%
% of firms that would
increase employment
by more than 10%
10% lower steel prices
43.5%
21.8%
20% lower steel prices
67.7%
44.9%
30% lower steel prices
80.9%
56.7%
Source:CSID
17
Interdepartmental Task Team
•
•
•
•
•
Ministers of Trade and Industry, Economic Development and
Mineral Resources have established an Interdepartmental Task
Team (IDTT)
The focus of this work is not on profit sharing between two
companies but on giving effect to the original intent of the
unbundling
IDTT’s mandate is to make recommendations on appropriate
policy tools to ensure the public developmental obligations of the
2001 unbundling are given effect to and long term:
– Viability and cost-competitiveness of local steel production
– Competitive steel pricing to support the development and
deepening of value-added manufactured products in
downstream industries.
Policy tools
– Mineral rights regime
– Competition policy and legislation
– Trade policy
– Investment
Process
– IDTT to develop recommendations and report back to
Ministers and Portfolio Committees
18