Post on 31-Dec-2015
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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
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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)
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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
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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)
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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)
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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
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Performance of the SA iron-ore industry
Iron ore sales: domestic and export 1990-2008, ‘000 tons
Source: DMR
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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)
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Performance of the SA Steel industry: Employment
Source: Quantec
Employment in basic iron and steel, metal products and machinery sectors, 1990 – 2009
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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
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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
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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%
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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