Cadac submits more evidence of how local steel users are prejudiced

4th November 2005 By: Terence Creamer - Creamer Media Editor

South African barbecue manufacturer Cadac, which lodged a complaint with the Competition Commission in 2004 alleging unfair pricing practices and producer-merchant collusion, has submitted its third and final update to the authority, in anticipation of a ruling by the end of November.

Should the commission confirm infringements of the law, it will refer the matter to the Com- petition Tribunal for further interrogation and hearings.

The Cadac case, it should be noted, is similar, but distinct, to complaints lodged by gold-miners Harmony and DRDGold, where the commission found no grounds for a referral and where the two complainants subsequently decided to lodge a direct referral with the tribunal. However, given the overlap, it is possible that the tribunal may decide to merge the two complaints once it proceeds with hearings.

In March 2004, the Roodepoort-based com-pany filed a complaint against South Africa’s largest steel producer, Iscor (now Mittal Steel South Africa), and steel merchant Trident Steel, in which it alleged abuse of dominance and market collusion. It claimed that the pricing mechanism employed had significantly undermined its ability to manufacture industrial liquefied-petroleum-gas (LPG) cylinders competitively and had precipitated the closure of its cylinder line in July 2003, for which it demanded compensation.

It has, however, since largely patched up its re- lations with Mittal Steel (which is now supplying the company directly with what it believes to be competitively-priced steel) and has focused its attack on the merchant sector, extending its accusations to include South Africa’s largest steel merchant, Macsteel, to which it turned following a breakdown in relations with Trident.

In its third representation, submitted to the com- mission on October 14, Cadac alleges material price discrimination against domestic steel users by Macsteel.

It has handed over detailed evidence, including invoices and quotes by Macsteel and Macsteel International (a joint venture between Mittal and Macsteel to market South African steel globally), which, it claims, highlights a deleterious pri-cing mechanism that strongly favours non-South African purchasers.

At the heart of the submission are Macsteel invoices to Cadac for February, as well as a ‘sales contract’ and pro forma invoice, dated July 19, 2005, generated by Macsteel International for the same steel grade (LPG 275) and issued to a cylinder manufacturer in Ghana, called Reltub.

In February, Cadac was being charged R7 388 (MacSteel invoiced price on 22/02/2005) or $1 223 (exchange rate R5,998/$1, February 2005). While, in July, Macsteel International’s pro forma invoice to the Reltub Company, in Accra, quotes a price of $498/t free on board (fob) Durban and $563/t cost, insurance and freight Accra. The quote fob Durban is 245% cheaper than prices charged to Cadac a few months earlier.

Manufacturing director Milosh Despotovich, who has led Cadac’s investigation and has kept impeccable records, accepts that the price of steel did fall from February to July 2005. However, he argues that, even if the decline had been 40%, the equivalent invoice for Reltub in February would still have fallen well short of the $1 200-plus charge to Cadac.

“Even if the price decline was 40%, the equivalent February invoice would still be only $700/t,” Despotovich avers.

He alleges that the Reltub invoice simply confirmed what had long been suspected by Cadac, which is that, “while South Africa is one of the cheapest steel producers, we get the worst prices in the world”.

Meanwhile, Cadac has also documented and submitted a detailed pricing comparison (on LPG 275 dimension 930 x 2.2) for the months February 2004 and February 2005 respectively.

Using an exchange rate of R6,784/$1 for Feb-ruary 2004 and R5,998/$1 for February this year, Cadac recorded a South Africa ‘base price’ from Mittal of R4 435/t for 2004 and R4 899/t for February 2005, an increase of nine per cent. It also calculated a final price, including transport, of R4 754/t and R5 868/t.

The ‘base price’ was 37% and 20% higher respectively than the benchmark MEPS price for the two months. However, Despotovich points out that it does show an attempt by Mittal to benchmark its prices more closely with international levels, as the MEPS rise was significantly higher, at 37%, than the adjustment made by Mittal. Nonetheless, the domestic price still remained 20% higher than MEPS prices.

The Macsteel invoiced price, on the other hand, showed no sensitivity to the growing demand for lower-priced steel. At R7 338/t in February 2005, the charge to Cadac was 28% higher in February 2005 than the R5 525/t charged in the same month a year earlier. The service charge for processing steel from Macsteel, meanwhile, was a whopping 57%, or R1 025/t more than the R771/t charged in February 2004. To press home its case, Cadac, which, since 2004,has done the bulk of its manufacturing in China, also shows quotes received from Baosteel, of China, to a Chinese cylinder firm. These were 32% and 35% lower than the South Africa domestic price for the respective months. And, given that the Chinese government offers an 18% rebate on manufactured exports, Cadac’s LPG steel price was, overall, 45% and 47% respectively higher than what it would have cost a Chinese competitor.

Cadac CEO Simon Nash, who has led the fight for cheaper steel ever since the company was forced to shut its industrial-cylinder manufacturing facility, says the work it has done on steel-pri-cing has forced it to change its attitude as to who the main culprits are in perpetuating the pattern of high domestic prices.

“Initially, we felt Iscor (now Mittal) was the main culprit, but now we believe that, while the steel producer is partially to blame, it is the merchants who are the biggest culprits,” Nash says.

In fact, he has high praise for Mittal CEO Davinder Chugh, who, he says, has made a real effort to understand and deal with Cadac’s problems. So much so, in fact, that Cadac is considering a large-scale re-entry into cylinder manufacture for third parties. The company is already producing small, low-cost cylinders for Easigas and BP, which sell these three- to five-kilogram cylinders into the so-called ‘reconstruction-and-development’ market.

Despotovich reports that it is working with Mit- tal’s marketing department to ensure that Cadac can bid for large tenders from the oil companies, which could emerge in the next few months. It is understood that government is looking to have small gas cylinders installed in 2,5-million houses over the next decade as a low-cost and safe energy alternative.

“Because cylinders are a commodity, the steel price is crucial to our competitiveness, as it comprises more than 60% of the cost of production,” Despotovich states.

Meanwhile, Macsteel has already indicated that it believes it is doing nothing untoward, noting import-parity pricing (IPP) is international best practice and that South Africa would be well advised not to tamper with it.

Macsteel MD Michael Pimstein, who is also the incumbent Steel and Engineering Industries Federation of South Africa president, argues that IPP remained the mechanism of choice, with only a few exceptions internationally, and was especially relevant where a country was seeking to apply international best practice.

He says there were many other constraints to downstream manufacture and that govern- ment intervention to prevent IPP is “short-sighted”.

Pimstein listed these constraints as volatility in demand and throughput inefficiencies; logistical costs and inefficiencies; labour costs; the shortage of design and engineering skills; insufficient market intelligence and knowledge of selling-price patterns; and the stronger South African exchange rate.

He has also labelled statements that steel is priced 30% to 50% higher in South Africa as misleading.

“Even if that price were correct, can the steel price alone be the only constraint when that steel content makes up less than 20% of the finished-goods price of the article?” he questions.