South Africa's Afripalm Resources signed a memorandum of understanding with Steel Authority of India to build a steel mill in South Africa, the Business Day reported on Wednesday.

Citing Afripalm Chairman Lazarus Zim, the paper said the companies would conduct a bankable feasibility study for a 21 billion rand ($2.95 billion) plant, expected to produce between 3-5 million tonnes of steel a year.

There is room for another steel mill for the domestic and export markets. The net effect will be to bring competition to the market and bring prices down, but this business has to make commercial sense, Zim was quoted as saying.

Zim resigned last year from the board of Kumba Iron Ore, the world's 10th largest iron ore supplier, to start a new steel firm.

The South African steel market is currently dominated by ArcelorMittal South Africa, a unit of the world's largest steel producer.

The government has in the past accused ArcelorMittal of charging excessive prices to the detriment of the local steel industry and for failing to pass the benefits of an iron ore discount it used to receive from Kumba to consumers.

ArcelorMittal is currently in a dispute with Kumba after a preferential deal with the iron ore supplier lapsed last year.

State-run SAIL said earlier this week it plans to spend $12 billion to build four overseas plants in Indonesia, Oman, Mongolia and South Africa.

The paper did not specify how the shareholding or funding for the South African project would be split. Zim could not immediately be reached for comment.