Subsidise the steel, or let it flounder

[] — WAS ArcelorMittal SA (Amsa) guilty of telling some “pork pies’ when it said up to 4,000 steelworkers at its Saldanha Steel plant would have to be retrenched were Kumba Iron Ore (Kumba) allowed to sell its product at the suggested interim pricing level of between $50 to $80/tonne?

The question is worth asking because the interim pricing for iron ore that Kumba and Amsa have now agreed is only slightly different to the original one. Following government’s intervention last week, Amsa will now pay $50/tonne to Saldanha Steel and $70/tonne to the inland plants.

Perhaps the $10 per tonne of iron ore to the inland plants makes all the difference? You wouldn’t have thought it in the early part of last week when market sources disposed to Amsa’s argument suggested Saldanha Steel would run at negative double digit operating margins at the higher iron ore prices.

And then there’s government which proved so unusually decisive in being able to broker a near instant resolution last week? Government officials certainly piled into the debate. Three ministers – Susan Shabangu (mines), Ibrahim Patel (economic development) and Rob Davies (trade and industry), with their respective DGs – dedicated time to the dispute.

I suspect a side deal in which conditions will be attached to an iron ore sales agreement, or a subsidy for Saldanha Steel. I can’t see how else government could both satisfy Kumba and keep a straight face when it said it was interested in keeping steel prices affordable.

It’s not unusual for governments to protect their steel industries. Import parity pricing does exactly that and it was once quite normal to see importers, the US in particular, slapping fines on exporters like Iscor for “dumping’ steel on to their markets.

One sidelight to this debate of sustaining South Africa’s steel industry – or Amsa in particular – is the impact on the western Cape economy were Saldanha Steel to close down.

Higher iron ore prices just confirm the choice government has before it: either continue with a subsidised steel industry in the name of job preservation and downstream development or let market forces take effect

If Saldanha Steel hits the skids, then so does Duferco, the downstream, steel-rolling plant that takes neighbouring Saldanha’s slab and presses it into thinner gauge steel for export. Add in the fact that there are plans to rezone one or more of the western Cape casinos and you can see the region’s slim economy becoming anorexically slight, so to speak.

Times have changed since Saldanha Steel was firstly established. In those times, it wasn’t just iron ore that could be bought cheaply. South Africa then had cheap labour before the Chinese piled in to the global economy and unions achieved better and greater leverage. It also had a surplus of cheap power from Eskom. A market related price for iron ore now means all three competitive advantages which underpinned the viability of Saldanha Steel have disappeared.

Seen in this light, Saldanha Steel’s business case was already under attack before Kumba considered lifting iron ore prices. Higher iron ore prices just confirm the choice government has before it: either continue with a subsidised steel industry in the name of job preservation and downstream development or let market forces take effect.

By the way, it would be interesting to see how Anglo American’s Namakwa Sands is faring amid the hike in power prices. It is the only other major industry operating on the western Cape peninsula.

Them again

Yes, gold quarterly time is upon us. Gold Fields reports on August 5, AngloGold Ashanti reports on August 12, Harmony Gold on August 16, and DRDGOLD reports 10 days later. My first ever story as a mining reporter was to cover Gold Fields of SA’s December gold quarterly for Business Day, although to speak of GFSA in those days also meant its coal and base metal assets as well as Northam Platinum.

These days, gold quarterlies are a far more pared down affair following a sustained period of margin pressure, exacerbated lately by the strength of the rand.

Occasionally, however, gold bugs get a lift as they have in the last few months of this year.

Over the June quarter, the JSE Gold sector has outperformed the JSE by 24% and the platinums sector by 26% with two of the local sector majors – Gold Fields and Harmony Gold – getting back on track in production, albeit off a very low base.

Helping their cause is the improved rand gold price, which was some 8.5% higher in the June quarter. As directed, AngloGold Ashanti will report a gold price received about 8% below spot owing to the effects of its remnant gold hedge.

Profitability will therefore improve but there’s probably some disappointment that the OECD’s inaugural study on the South African economy, which asked government to consider weakening the rand, is unlikely to be adopted by the South African Reserve Bank. It’s expensive to build foreign reserves when interest on the rand is so much better.