1

DTI RESPONSE TO IRON ORE,

STEEL AND STEEL PRODUCTS

VALUE CHAIN MATTERS

PORTFOLIO COMMITTEE OF TRADE & INDUSTRY

24 AUGUST 2010

2

The iron ore, steel and steel products value chain

Source: DTI

Blast Furnace

Rotary kilns

Midrex/ corex

Steel PlantsAMSA– VanderbijlparkAMSA – Newcastle AMSA – VereenigingAMSA– SaldanhaHighveld Steel – WitbankScaw Metals – GermistonDavsteel – VanderbijlparkCISCO - Capetown

Phalabora Mining (copper)

Foskor Ltd(phosphate)

Highveld S&VMapochs Mine

KumbaSishen Mine

KumbaThabazimbi Mine

Assmang –Beeshoek mineKhumani mine

Stage 1Mining

Stage 3Primary Steel Production

Stage 4: Steel Fabrication

Flat products: coil, sheets, strips, plate

(AMSA: 80% of HRC)

Long products: bars, rods, tubes, profiles, sections

(AMSA: 52%)

Scrap Metal

•Structural steel

•Building materials

•Pipe and Tube

•Wire products

•Capital equipment

(including mining and

transport equipment)

•Automotive components

•Packaging

•White Goods

etc

Stage 2Iron making

3

The developmental gains of downstream beneficiation

Source: DTI

Value-added, employment and investment per ton of steel along the iron ore, steel and steel products value chain

Selling price per ton of steel ($)

Employment per 1000 ton / annum steel

Investment Rm per job

Stage

Iron Ore $180 0.17 R8.5 m 1Iron $500 2Hot rolled Coil $585 3Cold rolled Coil $685 3Pipe and Tube $960 20 R1.5 m 3Structural Steel (ave. of heavy and light)

$3000 30 R0.5 m 4

Yellow Metals (ADT) $13700 150 R0.6 m 4

0.8 R7.3 m

4

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 anti-

dumping duties

5

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

6

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)

7

Steel Industry Policy and Developments:Import Parity Pricing – an Example

Hot rolled coil domestic and export prices

Source: Iscor, 2004

Import Parity Price US$/t 619

Transport to Gauteng

5% "Hassle Factor" / Local premium

Offloading and admin cost: 2.78%

Import duty: 5%

Export Price US$/t 480Shipping Cost to Durban

Wharfage,Commission and Delivery

Import Duties

Shipping to Export Destination

Iscor ex-works Price US$/t (Net Export Price) 376

Transport from inland to Durban

0

$45.0

$45.0

$14.7

$26.3

$21.7

$33.0

$31.0

$6.0

$34.0ACTUAL

COSTS

NOTIONAL

COSTS

DOMESTIC SALES

EXPORT SALES

8

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)

9

Cost Structures

Vanderbijlpark40/168

= 24th percentileSaldanha

24/168= 14th percentile

0

100

200

300

400

500

600

700

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

$ p

er t

on

ne

Source: MBR

Production Costs 2008 Q1: Hot Rolled Coil ($ per tonne)

10

Pricing

Source: MEPS, MBR, AMSA, DTI

615632

599618

840

618

726

534 546 559600

870

540

684

0

100

200

300

400

500

600

700

800

900

1000

2004 2005 2006 2007 2008 2009 2010 (Jan-July)

Arcelor Mittal South Africa (AMSA) USA CanadaEU (Average) Germany World AverageRussia Japan TaiwanSouth Korea PR China

Hot Rolled Coil Prices (US$/Ton) 2004 – 2010

11

Performance of the SA iron-ore industry

Iron ore sales: domestic and export 1990-2008, ‘000 tons

Source: DMR

12

Performance of the SA Steel industry

Steel sales: domestic sales, exports, imports and embodied in value-added exports, tons ‘000

Source: SAISI and DTI estimates after 2008

13

Performance of the SA Steel industry: Output

Source: Quantec

Output of basic iron and steel, metal products and machinery sectors, 1990 – 2009, R’millions (2005)

14

Performance of the SA Steel industry: Employment

Source: Quantec

Employment in basic iron and steel, metal products and machinery sectors, 1990 – 2009

15

Performance of the SA Steel industry: producer prices

100

125

150

175

200

225

250

275

300

325

350

375

400

425

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Basic Iron and Steel Metal Products Machinery and Equipment

Producer prices of basic iron and steel, metal products and machinery sectors, 1995 – 2009 (1995=100)

Source:StatsSA

16

Importance of steel pricing to downstream development

Sector Sub-sector % Direct inputs % Direct inputs + Indirect inputs

Metal products Structural metal products

32.0% 42.7%

Other fabricated metal products

36.6% 42.2%

Treated metal products

35.8% 40.9%

Machinery and Equipment

General machinery

19.3% 24.9%

Mining machinery 18.8% 24.4%

Food machinery 18.4% 23.4%

Source:StatsSA

Direct and indirect proportion of steel as an input into metal product and machinery sectors

17

Importance of steel pricing to downstream development

Source:CSID

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%

18

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