Finding Parity

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With the appreciating South African rand squeezing margins for exporters, two mining companies are looking to the government to bring down the cost of doing business in the country. By questioning the price of steel at a competition tribunal, their dispute is also highlighting some the economic problems associated with South Africa’s geographical isolation.

Harmony Gold and DRD Gold have challenged Mittal Steel over its pricing structure, claiming that the company is unfairly setting prices of locally produced steel at the same price as imports. They have cited evidence that, despite a softening of world steel prices, Mittal had not adjusted its prices.

However, Kobus Verster, executive director of finance at Mittal South Africa, does not agree that its pricing structure is out of sync with international norms.

“The international domestic pricing model which we have adopted recently is the practice which is followed by many commodities companies. If you look at Mittal South Africa’s longer term performance, it is not that great. The margins are comparable at best with normal mining-type operations. From our point of view, we feel that we are adopting an acceptable pricing practice. We don’t have a big import levy in South Africa,” he told OBG.

Import parity pricing is believed by most analysts to be detrimental to the cost of doing business in South Africa, and to the government’s plans to broaden the base of the economy.

Often described as an island economy situated in a sea of poverty, South Africa has stretched lines of communication with her major trading partners, Europe and the US. It is therefore expensive to import goods and materials vital for industry into South Africa. The absence of competition within certain areas of the economy has aggravated the parity pricing phenomenon.

Pepi Silinga, the chief executive officer of COEGA Development, an industrial development zone in the Eastern Cape, is all too aware of the problem.

“If you were to try and establish an aluminium benefaction company across the fence from an aluminium plant it would cost the same as if you were actually buying from London,” he said.

“South Africa is perhaps the most isolated economy in the world. You only have to look at the Southern African Development Community [SADC] region and understand some of the difficulties in so far as whilst that area has a lot of people, it is not a coherent market. So you can’t say that because your tariffs are relatively on the same par as similar economies that you are on an equal footing,” Silinga said.

The distance from trading partners is also why it is difficult for multinational companies to maintain a competitive edge in South Africa, with exporters facing inflated shipping costs to cover the long distances to overseas markets. Exporters are also suffering because of the stronger rand.

In geographical terms, South Africa is rarely described an attractive location to either invest in or export from. Many multinationals looking to invest in South Africa therefore look for added incentives. Import parity pricing has undoubtedly enabled Mittal to make South Africa a profitable investment, while it keeps an eye on longer term developments within the SADC region.

Though the country looks an attractive location for an African “footprint” investment, the lack of free trade within sub-Saharan Africa means that many companies are taking advantage of South African infrastructure and its expertise in regional markets. As the South African market is relatively small, many companies like Mittal are waiting for opportunities in places like the Democratic Republic of Congo and for greater market liberalisation in the wider region to materialise.

The case before the tribunal also raises interesting questions about whether a government which professes to aspire to free market ideals can force a major multinational to lower its prices. It is clear, however, that to a large extent import parity pricing is a failure of the free market, and the government has frequently said that it is willing to step in where the market fails. Whether a government which is determined to attract more foreign companies to South Africa’s shores will be willing to apply pressure to a major foreign company like Mittal is another question.

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