The Competition Commission has approved steel producer ArcelorMittal South Africa’s (AMSA’s) proposal to pay a fine of R1.5-billion to the commission for its involvement in long steel and scrap metal cartels.

This will be the largest competition-related fine ever paid by a single South African entity and will settle all pending investigations and prosecutions against AMSA.

The commission last week filed an application with the Competition Tribunal to confirm this settlement agreement as an order of the tribunal, as the agreement related to various cases that the commission had investigated against AMSA, some of which were subsequently referred to the tribunal for adjudication.

In terms of the settlement, AMSA agreed to limit its earnings before interest and taxes (Ebit) margin for the next five years to a cap of 10% for flat steel products sold in South Africa and to spend R4.6-billion in capital over the same period.

In turn, the commission has agreed that the settlement will cover all pending cases against the steel producer that are still under investigation.

Competition Commissioner Tembinkosi Bonakele noted that the commission was happy that the long-standing proceedings had come to an end.

“The penalty sends a strong message of deterrence and is an important milestone in the commission’s enforcement against cartels. In addition, the pricing remedy reflects our desire to protect South African consumers against dominant firms, particularly on key industrial products,” said Bonakele, adding that the remedy was a safeguard in the event that AMSA reverted back to the historical prices that the commission regarded as excessive.

When proposing the settlement in February, acting AMSA CEO Dean Subramanian noted that a provision of R1.25-billion had been made for the settlement as part of a one-off provision of R2.6-billion for 2015. Together with impairments of R6.8-billion, the one-off writedowns 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 at the time 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.

The case evolved in the following manner:

•Based on a complaint by the Department of Trade and Industry, the commission initiated a complaint in July 2011 into AMSA’s pricing policy for its flat steel products. The investigation, which has not been concluded, alleged that AMSA had been charging excessive prices for its flat steel products and that this was in contravention of the Competition Act.

• Following an investigation initiated in December 2009, the commission found that several scrap metal consumers, including AMSA, Columbus Steel, Cape Gate and Scaw Metals, had collaborated and acted in tandem with the upstream cartel of scrap merchants. Fixing the purchase price of scrap metal, the firms collectively negotiated and agreed on a standard formula that was used to determine the purchase price of scrap metal as a buyers’ cartel.

• Owing to concerns about the increasing price of steel products, despite South Africa being a net exporter of steel, the commission initiated an investigation into long and flat steel producers, including AMSA, in April 2008. The commission’s investigation found that AMSA, Cape Town Iron & Steel Works (Cisco), Scaw and Cape Gate, as competitors in the manufacture of long steel products, colluded by fixing prices and discounts, allocating customers and sharing commercially sensitive information through the South African Iron and Steel Institute (Saisi) and the South African Reinforced Concrete Engineers Association.

• Also in April 2008, the commission initiated an investigation into flat steel producers Highveld and AMSA. It found that, during 1999 and 2009, AMSA and Highveld had an understanding that Highveld would follow AMSA’s lead on pricing in the flat steel market. The commission also found that AMSA and Highveld had used industry association Saisi to exchange commercially sensitive information, such as sales volumes. This conduct constituted price fixing and market allocation in contravention of the Competition Act.

• In 2003 and 2008, the commission received two complaints from Barnes Fencing Industries, F&G Quality Tubes and Dunrose Trading, alleging that AMSA differentiated between its customers in terms of discounts offered for low-carbon wire rods. Following an investigation into the matter, the commission found that AMSA had engaged in price discrimination, which contravened the Competition Act.

AMSA admitted to the allegations outlined in respect of the flat steel complaint and the Barnes Fencing complaints, but did not admit that this conduct constituted a contravention of the Competition Act.

AMSA also disagreed that it had acted in contravention of the Competition Act with regard to the pricing complaint. However, it agreed to address the Competition Commission’s concerns about its pricing conduct.

The steel producer did, however, admit to contravening the Competition Act by colluding with Cisco, Scaw and Cape Gate to fix prices and discounts, allocate customers and share commercially sensitive information in the market for the manufacture of long steel products. AMSA also admitted to fixing the purchase price of scrap metal with Columbus Steel, Cape Gate and Scaw.