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Harmony Set For Tribunal Showdown With Mittal Sa

Published by MAC on 2006-02-22

Harmony set for tribunal showdown with Mittal SA

by Nicky Smith, Johannesburg

22nd February 2006

Harmony Gold takes up its crusade against the pricing practices of Mittal Steel South Africa early next month as it seeks a ruling from the competition tribunal that would reduce steel prices for local users.

Mittal Steel SA uses an import-parity pricing model, which means that even though its output costs are in the lowest quartile for producers globally, it charges its local customers the costs associated with importing the steel.

These costs include notional charges for insurance, storage and freight, including a seaborne fee, and possibly rail or road transport tariffs as well. This means that even if a local steel user stands at the gates of the Vanderbijlpark factory with a truck to transport the steel, it will still pay all those charges.

Mittal SA does this because it can. There is virtually no local competition to the steel maker, which enjoys an overall market share of about 84 percent.

Harmony chief executive Bernard Swanepoel says the gold producer has spent R1.5 billion on steel in the past four years and has paid between 30 percent and 50 percent more than if it were able to buy steel at the same price that Mittal SA sets for its exports.

Outlining the argument that Harmony will present to the tribunal between March 15 and April 5, Jean Meijer, Harmony's attorney, says Mittal SA charges excessive prices because it has "market power", or "super market power".

In flat steel products, Mittal SA has 84 percent of the market, and Meijer says the threshold to indicate market power is a 45 percent market share.

She adds that whenever Mittal SA announces a price increase, other local steel producers, such as Highveld Steel and Vanadium, raise their prices within hours to match those of Mittal SA.

She says the competition authorities are investigating allegations of collusion between local steel producers.

"Mittal's export prices reflect its low production costs, as do the large volumes of exports," Meijer says. "Import-parity prices at home rather than export prices are indicative of the exertion of market power.

"Mittal Group is among the most profitable steel firms globally; Mittal SA's margins per ton are close to three times the average for the parent group."

Swanepoel says that if Harmony secures a favourable ruling from the competition tribunal that would make domestic steel prices comparable to export prices, it could save R1.7 billion over the next 15 to 26 years on investment in its mines in South Africa, assuming steel prices increase at about 6 percent a year, which is the top end of the Reserve Bank's targeted inflation band.

Mittal SA's spokesperson, Tami Didiza, said the firm respected the tribunal and would not engage on the issue through the media.

[Business Report and Independent Online Pty (South Africa) February 22 2006

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