Steel producer ArcelorMittal South Africa (AMSA) and government have agreed to remove import parity pricing with immediate effect in a bid to boost South Africa’s steel industry.

The local price for flat steel products will be based on an import-weighted basket.

“It will be determined by the weighted average of countries we compete with and will exclude China and Russia,” Trade and Industry Minister Dr Rob Davies, told Parliament’s Trade and Industry Portfolio Committee on Tuesday.

The decision follows mounting concern about the global steel glut. The new agreement will make sure that domestic prices do not increase on an import parity basis when the international steel price increases in future.

“We have tried to develop a solution that will ensure the continued production of primary steel in South Africa, and at the same time address some of the structural challenges around pricing policy,” Davies said.

He said the basket aimed to provide a fair price during boom and bust periods.

The pricing principles would apply to flat steel products, which have more value-add.

The weighted average will be based on the domestic steel price in countries South Africa competes with in steel-intensive downstream sectors and subsectors. These are fabricated metal products, machinery and equipment and vehicles and other transport equipment.

The basket of countries come from the European Union, which makes up 50% between France, the UK, Italy and Spain; Asia – making up 30%, and the US, Canada and Brazil completing the basket.

“When ArcelorMittal reviews its flat steel pricing, it will be done using a transparent mechanism based on forecast basket prices using the latest CRU published prices, where available, and the rand:dollar exchange rate, assuming one month forward. The announced and published price will include the settlement discount, currently at 2.5%,” said Davies.

He said the agreement on a set of principles for flat steel pricing in South Africa would ensure that steel-dependent industries were competitive while at the same time ensuring that the upstream steel mills remained sustainable.

The announcement follows the Competition Commission’s settlement with AMSA. The company admitted to being involved in the long steel and scrap metal cartels, and agreed to pay an administrative penalty of R1.5-billion in five annual installments of no less than R300-million.

AMSA has also committed to R4.6-billion capital expenditure over the next five years. Davies said he hoped this would help to make the steel industry far more competitive than it is.

“The obligations we have extracted from ArcelorMittal are significant as we move ahead in order to find the balance, save primary steel manufacturing in this country, and ensure some steps towards the change of behaviour by primary steel manufacturers,” said Davies.

He disputed criticism by Democratic Alliance MP Dean Macpherson, that the government had been "shielding" AMSA, which it accused of "ripping the ring out of the downstream market for too long and without any consequences."

“We share the view that ArcelorMittal’s pricing has been damaging to downstream industries. But we are not dealing with angels and devils here. It is a much more mixed picture. We have had to act to make concessions, otherwise we risk losing primary steel manufacturing in South Africa,” said Davies.