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Price model shift may close Mittal SA

An expert witness brought to the Tribunal believes the co may have to close down if it was forced to change its pricing model.

india Updated: Apr 14, 2006 17:54 IST

An expert witness brought to a Competitions Commission Tribunal against Mittal Steel SA believes the steel giant may have to close down in the longer term if it was forced to change its pricing model.

Mike Walker, deputy chairman of the financial consulting company CRA International and a specialist in competition law, was the last witness in a case brought to the tribunal in which several local steel users, including mining company Harmony Gold, have charged that Mittal's import parity pricing model was unfair.

Import parity pricing, which London-based magnate Lakshmi Mittal's company claims to have dropped in favour of another one, saw local buyers being charged the same price that they would have paid if they imported the steel, with freight and other costs being added to local prices.

Walker was trying to prove to the tribunal that Mittal Steel SA's pricing structure was not extraordinarily high because when viewed historically, the company was unable to earn enough during the steel purchasing cycle to cover its weighted average capital cost (WACC).

"I don't propose that Mittal shut down immediately. It has its assets and should continue using them," Walker said.

But in response to a question from Harmon Gold's senior legal counsel, David Unterhalter, on whether Mittal's operations were unsustainable in the long term, Walker said: "On the basis of the figures, yes. Mittal should not continue its operations in the long term."

Unterhalter rejected the theory suggested by Walker on the grounds that if it were correct, the future was very bleak for five other top South African companies.

He said the listed companies SABMiller (which also has operations in India), former state-owned telecoms monopoly Telkom; supermarket giant Pick 'n Pay and retail group Edcon had all not covered their WACC for the past five years, according to Walker's model.

A fifth South African company, petrochemicals giant Sasol, had just managed to achieve this in the last year, but had still shown exceptional returns in the past few years.

"If your theory is correct, it sketches a sombre picture that some of the most important companies in South Africa's corporate landscape do not have a long-term future," Unterhalter argued.

Commenting on the unprecedented interest in Mittal shares despite the current pressure that the company is under, Walker said this had very little to do with the Mittal group's financial performance in the long term, but rather with world steel prices which have risen rapidly in the past few years.

"The fact that a share price rises or falls tells you nothing about the company's profitability. You can find a company, which consistently destroys value, but if a piece of good news about the company is made known, the share price will increase. But it actually has no relevance for the firm's financial performance."

The tribunal is expected to make its findings known after the Easter recess of several public holidays over the next fortnight.

The LNM Group of Lakshmi Mittal first entered into a relationship with the former state-owned Iscor by helping turn the ailing steelmaker around with a Business Assistance Agreement. In return, LNM received a stake in the business. It later acquired enough shares to take control of the company and renamed it Mittal Steel SA.