MONOPOLY
ABUSES PINNED TO MITTAL
Decision in South Africa Sheds Light on Company Practices
© by Mark Reutter
Posted 3/28/07
In a finding with implications for U.S. steel markets, the Competition Tribunal of South Africa has found Mittal Steel guilty of abusing its market position and “charging excessive prices to the detriment of consumers.”
The tribunal ruled yesterday that Mittal Steel South Africa Ltd. has violated the country’s Competition Act by adding various fees to steel sold within the country and conspiring with an affiliate, Macsteel International, to control output so as to keep prices high.
The case was brought by Harmony Gold and DRD Ltd., both South Africa mining companies, which alleged that Mittal SA’s manipulations have inflated the price of steel in the country by as much as 40 percent.
The tribunal will hold off on announcing any structural remedies until it has heard further evidence relating to a penalty. In addition to facing up to 800 million rand ($112 million) in fines, Mittal SA may be forced to change its pricing system, sell Macsteel International, or even divest of one of its four major steel facilities.
Beginning in 2001, Mittal purchased stakes in former government steel facilities and currently accounts for about 80 percent of domestic flat-rolled sales. Since August 2006, Arcelor Mittal, headed by Lakshmi Mittal, has directly controlled Mittal SA.
In the U.S., Mittal controls about 40 percent of domestic flat-rolled sales – used for making cars, refrigerators, and some military goods – and further controls (with one other producer) 74 percent of the tinplate market, used to make metal cans and other consumer items.
Last month, the U.S. Department of Justice ordered Mittal to sell its Sparrows Point, Md., plant to prevent “competitive harm” arising from its share of the tinplate market. While a positive step, this writer has called upon DOJ’s anti-trust division to undertake a fundamental examination of steel pricing since Mittal gained control of U.S. steel plants in 2005.
Mittal SA was found guilty of “the most fundamental and egregious monopolistic conduct” of withholding supply from the domestic market by purposefully manipulating supply to keep demand high and prices within predetermined target levels.
Interestingly, Mittal SA did not withhold supply by physically reducing output at its South African mills, but by selling its steel for international markets only through Macsteel International.
Fifty percent owned by Mittal, Macsteel was barred from selling any steel products in South Africa at prices lower than Mittal’s own inflated prices.
Mittal SA calculated higher rates for domestic steel than for exports by using an “import-parity pricing model,” which added freight and other charges that customers would pay if they had to import the steel from the Black Sea. Testimony from Mittal executives revealed that the company added on top of ocean shipping costs, a phantom import duty of 5 percent, a commission of 2.5 percent, and “the logistical port and railage cost” of transporting the steel between a port on the Indian Ocean and Johannesburg in the center of the country.
A steel buyer who came to the gates of a Mittal mill with a truck to transport the steel would still pay all of these charges.
While the company claimed that it has replaced the import-parity pricing model with prices “based on a basket of domestic prices in a number of comparable countries,” the tribunal said that prices have shown no discernible change since 2005 and remain highly inflexible.
What’s more, whenever Mittal announces a price increase, the other domestic steel producers raise their prices within hours to match those of Mittal.
In the parlance of U.S. steelmakers back in the 1950s, these small producers are simply “meeting the competition” in a rigged business. And if they fail to follow Mittal, one of the company’s executives testified before the competition tribunal, “Mittal Steel South Africa, being the dominant player in the market, has the muscle and the power to take out those guys.”