1. 1 DTI RESPONSE TO IRON ORE, STEEL AND STEEL PRODUCTS VALUE CHAIN MATTERS PORTFOLIO COMMITTEE OF TRADE & INDUSTRY 24 AUGUST 2010

2. 2 The iron ore, steel and steel products value chain Source: DTI

3. 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

4. 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. 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. 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. 7 Steel Industry Policy and Developments: Import Parity Pricing – an Example Hot rolled coil domestic and export prices Source: Iscor, 2004

8. 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. 9 Cost Structures Source: MBR Production Costs 2008 Q1: Hot Rolled Coil ($ per tonne)

10. 10 Pricing Source: MEPS, MBR, AMSA, DTI Hot Rolled Coil Prices (US$/Ton) 2004 – 2010

11. 11 Performance of the SA iron-ore industry Iron ore sales: domestic and export 1990-2008, ‘000 tons Source: DMR

12. 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. 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. 14 Performance of the SA Steel industry: Employment Source: Quantec Employment in basic iron and steel, metal products and machinery sectors, 1990 – 2009

15. 15 Performance of the SA Steel industry: producer prices Producer prices of basic iron and steel, metal products and machinery sectors, 1995 – 2009 (1995=100) Source:StatsSA

16. 16 Importance of steel pricing to downstream development SectorSub-sector% Direct inputs% Direct inputs + Indirect inputs Metal productsStructural 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 machinery18.8%24.4% Food machinery18.4%23.4% Source:StatsSA Direct and indirect proportion of steel as an input into metal product and machinery sectors

17. 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 prices43.5%21.8% 20% lower steel prices67.7%44.9% 30% lower steel prices80.9%56.7%

18. 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