The iron ore, steel and steel products value chain

1. DTI RESPONSE TO IRON ORE, STEEL AND STEEL PRODUCTS VALUE CHAIN MATTERSPORTFOLIO COMMITTEE OF TRADE & INDUSTRY24 AUGUST 2010

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

3. The developmental gains of downstream beneficiation Value-added, employment and investment per ton of steel along the iron ore, steel and steel products value chain Source: DTI

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

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

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

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

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

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. Importance of steel pricing to downstream development Direct and indirect proportion of steel as an input into metal product and machinery sectors Source:StatsSA

17. Importance of steel pricing to downstream development Estimated output and employment responsiveness of downstream steel firms to reductions in the domestic price of steel Source:CSID

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