Click to edit Master subtitle style 10/15/10 South African steel prices and the canning sector in 2010 Peter Schwardmann Université du Toulouse Don Ross University of Cape Town

10/15/10 The SA fruit canning industry 85% of output is exported, with Europe and Japan as the largest destinations. The industry directly employs about 11,000 people, and indirectly employs another 18,000. The premium product is highly competitive and profitable, but this depends on economies of scale from mass market production. To be viable, the industry must be able to see its mass market product above cost.

10/15/10 Barriers to investment The industry has been suffering from under- investment for several years. The main reasons for this are, in order of importance: (1) tariffs imposed by the EU; (2) recurrent periods of Rand strength; (3) the high price of cans. The industry can’t be profitable in periods when it experiences all three of these problems at once.

10/15/10 The steel cost in fruit canning The can is the single largest item in the cost of producing a can of fruit – about 30%. AMSA produces about 60% of the steel used in making tinplate for SA cans of fruit. The remainder is imported.

10/15/10 AMSA’s pricing and costs The price of tinplate was raised by 68.9% in April 2009, resulting in a 40 % to 45% increase in the price of cans. The co-occurring rise in the Rand amplified this. A 45% to 55% increase in the price of cans raises canned fruit production costs by about 15%. Our analysis of demand elasticities for canned fruit in the EU indicates that if fruit canners attempted to pass on a 15% increase in their output price to European importers, this would predict a 22.5% decrease in export volumes.

10/15/10 Roberts (2008), Journal of Competition Law and Economics AMSA’s plant in Vanderbijlplark has consistently been in the lowest quartile of the world’s steel producing plants in terms of operating costs. AMSA’s business in Africa and Asia has, over the recent past, achieved operating margins more than three times higher than those prevailing anywhere else in the world.

10/15/10 Import parity pricing SA’s steel market is too small to influence global terms of trade in steel or steel-based prices. Therefore, import parity pricing is simply suppression of an aspect of comparative advantage.

10/15/10 Strategic motivations? In supplying a group of industries that constitute designated targets for industrial policy, charging high prices may constitute an effective strategy to obtain a larger share of the resources government commits to industrial growth. This is indeed the strategy that a game theorist would recommend to a monopolist in these circumstances. Thus the apparently peculiar action of squeezing customers when they are already under unusual pressure can be rationalized. Indeed, the greater the strain on industries such as fruit canning, the sooner government might be expected to ride to their rescue. Government should also play this strategic game wisely. When industries are designated as potential beneficiaries of industrial policy, measures must be put in place to prevent suppliers to the selected sectors from capturing the lion’s share of the reallocated public resources.

10/15/10 Domestic prices of tinplate in Rands/ton to 09/09

10/15/10 Export prices of tinplate in Rands/ton to 09/09

10/15/10 Price quotations from ArcelorMittal SA and international tinplate producers, 09/09

10/15/10 In October 2009, AMSA reduced prices by 26-30% What have the implications of this been?

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How big should the 10/09 reduction have been? AMSA may have based the reduction on the August / September price basket and exchange rate. However, realized data suggest that previous over-pricing wasn’t fully corrected; this would have required a reduction of about 39%.

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The situation in late 2010? 5% Nampack price increase suggests that AMSA did not reduce prices after 03/10, but may indeed have raised them. We therefore conservatively compare AMSA prices of 10/09 with the international price basket for 08/10.

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Conclusion AMSA’s pricing power continues to harm export sectors that use steel as a significant input. We estimate that AMSA is currently over-pricing, by comparison with its avowed formula, by about 8%.