By Fakir Hassen, IANS
Johannesburg : The Tata Group of India and the South African government will need nerves of steel if they want to take on well-established giant Mittal SA by setting up another steel plant, analysts here say.
Market speculation is that the government, which a few years ago handed over control of the former state steel producer Iscor to London-based India-born steel magnate Lakshmi Mittal’s’ company, is now considering establishing a state-funded steel plant again as an alternative to Mittal SA, with the Tatas being considered as a major player in this process.
Ironically, Mittal had bailed out the ailing state-owned Iscor with a huge cash injection before eventually taking a controlling interest in the company which was renamed Mittal SA and is currently in the process of becoming ArcelorMittal, a subsidiary of the new world giant formed after Mittal bought out Arcelor.
Earlier reports indicated that the government had initiated a study into the viability of building a steel plant to support its industrial growth strategy. This comes at a time when Mittal SA faces a record fine of almost R700 million ($98 million) from the Competitions Tribunal here after being found guilty of anti-competitive practices that disadvantaged local customers, who paid more for steel than the price at which Mittal SA exported it.
The speculation increased here after Tata Group reportedly said earlier in the week that it was considering establishing a carbon steel plant in South Africa with an annual output of five million tonnes, half of what Mittal does at present. The South African Trade and Industry ministry also confirmed talks with the Tatas “and a number of other players”, but did not provide any further details.
Although the Tata Group is a favourite with the South African government as India’s largest investor in the country in various fields, from telecommunications and the automotive industry to hotels and electricity production, analysts said the potential steel partnership would be much more difficult for various reasons.
Summing up these challenges, the daily Business Day wrote: “The new entrants are looking at establishing a plant decidedly late in the cycle. Surely if it brings production capacity on stream in 2011 – building a steel plant from scratch will take at least years – it is likely to have missed the big wave of steel demand?
“(More challenges are that) Mittal, with its 70 percent market share is entrenched in the domestic market. Mittal has developed niche products over many years – an advantage a new entrant simply won’t have.”
Dirk Kotze, an industrial analyst with Coronation Fund Managers, told Business Day that while the plan to create more competition in the industry was a good one in principle, it remained an “idealistic” one.
“The South African market is too small to accommodate more than one world-class steel producer. The cycle is also fairly mature and lead times for steel plants are long.”
Kotze added that any new entrant was also unlikely to get the competitive advantage that Mittal SA has of an evergreen agreement with Kumba Iron Ore which gives the company its local iron ore requirements at cost plus three percent.
Five other international steel producers, mainly from Japan, have also shown an interest in starting up in South Africa according to Toni Poli, chief executive of the Australian-South African mining firm Aquila Resources.
Poli confirmed that his company’s exploration plans at two South African locations could result in a foreign steel manufacturer setting up a steel mill in the country, but did not provide any further details of which steel mills had shown such interest.