JSE-listed steel producer ArcelorMittal South Africa (AMSA) confirmed to Engineering News Online on Monday that the price of flat and long steel for delivery from June 1, 2010, would increase by between 2% and 17%, depending on product type – news of the increase was met with anger by steel consumers.The June increases would be over and above the R600/t surcharge instituted from May 1, 2010, as part of a bid by AMSA to mitigate against the impact of a possible surge in iron-ore costs, precipitated by the cancellation of a favourable supply agreement with Kumba Iron Ore's (KIO's) Sishen Iron Ore Company (SIOC).
SIOC cancelled a long standing cost-plus 3% deal in February, citing AMSA's failure to convert a 21,4% undivided share of the mineral rights at the Sishen iron-ore mine, in Northern Cape province, as is required by South African mining legislation, as the reason for the decision.
The matter is currently the subject of a corporate dispute, which should go before an arbitration panel later this year, but which, in AMSA's view, could take up to 18 months to resolve.
In the interim, AMSA is being invoiced on commercial terms, but is only paying at the cost-plus 3% level. It is placing the proceeds of the surcharge into an escrow account, marked as a contingent liability in its accounts, pending the outcome of the arbitration process.
AMSA has confirmed that the difference between the cost-plus 3% invoice and the commercial invoice received in March was a whopping $100/t on the 350 000 t received from SIOC in March.
Should AMS prevail in its dispute with KIO, it has promised to reimburse consumers. But it is unclear how far down the supply chain such a reimbursement could feasibly reach, owing to the fact that many end consumers buy their steel from traders, or merchants.
The Department of Trade and Industry (DTI), which referred AMSA to the Competition Commission when the surcharge was announced, claiming that it amounted to abuse of dominance, has also questioned how the proposed reimbursement could feasibly be implemented.
The June increases, which were communicated to customers over the weekend, were also the first "base" price rises on domestic carbon steel this year, with prices having been rolled over since December 2009.
In fact, the steel group cut prices in November, having increased prices between July and October, when international selling prices began recovering from their precipitous recession-linked declines of late 2008 and early 2009. Prior to July, the price of some steel products sold domestically fell by as much as 60% from the record levels achieved during the first half of 2008.
In the flat-steel segment, plate prices were set to increase fastest from June, at around 17%, while galvanised steel would increase by a more modest 4%. Prices in the more competitive long-steel environment would rise by between 2% and 4%, depending on product type.
AMSA insisted on Monday that it was continuing to set domestic selling prices on the same basket formula that it had been using since moving away from import-parity pricing earlier in the decade.
Prices are set after analysing domestic prices in four markets (the US, Germany, Brazil and China) and adjusting these to its expectations for the South African currency for the forthcoming month - the weaker the currency outlook, the higher the steel price. The South African currency was one of the best performing in the world during 2009, and showed continued resilience during the first quarter of 2010.
DOWNSTREAM ANGER
Downstream steel users were equally outraged by the surcharge and by the prospect of the base price increasing in June.
Africa Cellular Towers (ACTOWERS) GM for the powerlines division Nick van der Meschttold Engineering News Online that the increases would place untenable pressure on the company's manufacturing unit.
He said that it had reached a point where it was cheaper to import finished product from India and China than to source the steel, which comprised some 70% of the cost of the final product, locally. The company designs, manufactures and installs towers for the cellular industry, as well as for the power transmission and distribution market.
He said it was also unclear whether it would be able to pass on the surcharge to its customers, owing to the uncertainty as to whether the surcharge could be reflected in the cost price adjustment (CPA) index complied by the Steel and Engineering Federation of South Africa. "If it's not in the CPA index, then we are going to lose money automatically," Van der Mescht said.
A steel trader canvassed by Engineering News Online said that there was also uncertainty as to whether the surcharge would be maintained at R600/t, or whether it too was subject to adjustment, along with the spot iron-ore price.
Another steel consumer told Engineering News Online that there could be no justification for the surcharge, owing to the fact that it was an attempt by AMSA to recover the costs brought about by its own "corporate neglect" in failing to convert its Sishen mineral rights.
Speaking on condition of anonymity, the consumer argued that promised of the surcharge reimbursement was "entirely unsatisfactory", as the proceeds would, in most cases, flow to the merchants rather than to the end-consumer.
Van der Mescht added that ACTOWERS did not believe "for one second" that it would recoup the cost of the surcharge, adding that the immediate cash flow effect on its manufacturing unit was devastating. He said that its facility had the capacity to convert 3 000 t/m of steel, but that it was currently operating well below that level.
AMSA said last week that it was in the "process of evaluating various alternative options to determine the most appropriate mechanism to implement such a refund in consultation with its customers for the benefit of the steel industry in South Africa".
Source http://www.engineeringnews.co.za
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