Competition Commission to investigate steel market

The Competition Commission has published draft terms of reference for a market inquiry into the steel industry after intermediate industrial products were identified as a priority sector for the commission’s attention.

Steel is such an essential input for many strategic and core segments of the economy and therefore, it is no surprise that the commission considers it important to determine whether the industry is functioning optimally, says Lara Granville, director at law firm Cliffe Dekker Hofmeyr’s department of competition law.

Taigrine Jones from the same department adds that the steel industry faced the attention of the commission before, including prosecutions for excessive pricing of steel products and investigations into alleged cartel conduct by various players within the steel value chain, such as the producers of long and flat steel products, wire rod, and scrap metal.

“Now the commission’s gaze is less focused on discrete conduct by discrete entities as the commission proposes an extensive scope of inquiry allowing it to consider conditions and conduct across players across the value chain,” he says.

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Steel remains a strategic industry

According to the terms of reference, steelmaking remains a key strategic industry for South Africa, representing 1,5% of the country’s gross domestic product (GDP) and accounting for approximately 190 000 jobs.

However, the country’s global position as a steel producer is declining. Although the local steel industry was ranked 19th in terms of global crude steel production and largest on the African continent in 2014, it ranked a meagre 32nd place in 2019.

Despite the decline, the terms of reference still recognise that the domestic iron ore industry has the potential to be globally competitive thanks to the high quality of iron ore the country produces.

The inquiry will be confined to two levels of the steel value chain, namely the provision of inputs and raw materials for steel production and primary steel production.

The terms of reference imply that a particular focus in analysing the input level of the supply chain will be on iron ore and coking coal as the main inputs for steel production, but the supply of other inputs, such as scrap metal, also appear to be within scope, Granville says.

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Iron ore concerns in the steel market

Regarding iron ore, the terms of reference point to various supply concerns that include:

• Market concentration and market power: the commission found before that the largest three market participants account for more than 95% of total ore mined and the inquiry will investigate whether they can act without constraint from their competitors and customers.
• Pricing dynamics: the inquiry will determine if a price set with reference to what may be achievable in international markets is reasonably related to production costs or any other competitive price that may be used as a benchmark.
• Access to rail and port capacity and impact on emerging iron ore miners: the inquiry will investigate if allocations of capacity on the ORYX line are done in a competitive and non-discriminatory way and whether these arrangements can impede participation and expansion of emerging miners to export iron ore.
• Regulatory barriers: the inquiry will investigate to what extent mining and environmental regulations hinder competition through raising barriers to entry.

Coking coal supply

Regarding coking coal, the terms of reference list these focus areas regarding supply:

• Localisation, entry and expansion of coking coal supply as South African steel manufacturers rely significantly on imported coking coal since this it is not manufactured on a large scale locally.
• Pricing, as the reliance on imports in some markets allows local producers to set their prices at import parity levels.

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Upstream steel production

Regarding upstream steel production, the Inquiry aims to:

• Review ownership patterns of steel mills and assess historical and current industrial policies in place to support steel producers.
• Assess measures to promote entry and expansion of steel producers and specifically small- and medium-sized businesses controlled or owned by historically disadvantaged people.
• Assess challenges steel producers face and factors surrounding the closure of some steel mills
• Assess the price setting mechanisms, including pricing trends in South Africa as opposed to international pricing.
• Consider pricing to downstream players and the role that traders play in price setting.
• Consider the role of tariffs and trade remedies in the steel industry and the impact of import duties on intermediaries and end customers of the upstream steel producers.

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Aims of inquiry into steel market

The inquiry aims to determine if there are market features impeding competition at the input level of the value chain, particularly in respect of market concentration, pricing of inputs and barriers to entry and expansion.

“It will be interesting to see how the Commission weighs the consideration of small- and medium enterprises owned by formerly disadvantaged people with the acknowledged high capital costs required to establish a steel plant and mine and supply iron ore,” Granville says.

The scope of the inquiry is wide. In its present form, it includes everything from inputs and logistics to import duties and environmental concerns in a range of different markets including mining iron ore, importing coking coal and steel production.

Jones says this will involve canvassing the views and submissions of a huge range of industry participants and will in turn result in recommendations affecting players across multiple markets.  

Members of the public are encouraged to comment on the draft scope of the Inquiry on or before 5 May 2023. Written submissions can be sent to ccsa@compcom.co.za for the attention of Mapato Ramokgopa and Tlabo Mabye.