Government is planning a robust intervention in the Kumba-ArcelorMittal iron-ore supply standoff, seen as a crucial proxy battle within the broad and long-running legal dispute over the rights to Kumba’s Sishen iron-ore mine in the Northern Cape.
Following this week’s full 56-page judgment that shut out politically connected Imperial Crown Trading (ICT) from the massive ore body, ArcelorMittal celebrated what it felt was an outcome that could strengthen its case to force concessional prices from Kumba.
That could be premature, with the department of trade and industry now considering tough legislative interventions to force the steel giant to cut its controversial domestic prices. The saga, which goes to the core of some of the regulatory uncertainty that is hobbling investment in the mining sector, looks set to evolve into an even bigger legal battle in the new year.
Nimrod Zalk, head of industrial development at the department, told the Mail & Guardian this week that a task team had been mandated by Cabinet to consider the legal options it could use to intervene in this case.
“One of the judgment calls we will have to make is do we wait for the legal process to be completed or do we invoke some of the legislative instruments available to intervene even before it goes to arbitration,” said Zalk. “While we’re under instructions not to show our heavy hand just yet, we might have to resort to intervening using the existing Mineral and Petroleum Resources Development Act, Companies Act and competition laws before the arbitration process resumes.”
The arbitration, which has been suspended indefinitely until the legal process over the mining rights has been finalised, centres on a 2001 supply agreement negotiated when state entity Iscor unbundled, allowing ArcelorMittal to buy iron ore from Kumba’s Sishen mine at cost plus 3%.
The intention of the cost plus 3% agreement at the time was that steel-making operations would receive concessional access to iron ore in exchange for competitive steel prices. But it has been a long-standing gripe of the government that ArcelorMittal, South Africa’s largest steelmaker, has never passed that “developmental price” on to consumers.
For the past decade, the government has tried to force ArcelorMittal to charge export-parity prices, arguing that its pricing is higher than the world average and most developed and emerging market producers. (See “How the cost of SA’s steel compares”).
Under pressure
But ArcelorMittal has not bowed to government pressure. The difference this time round is that the department of trade and industry believes it has found grounds for greater toughness in existing legislation, including attaching conditions to mining rights that limit the prices manufacturers can charge.
“ArcelorMittal has continued to charge import-parity prices under the guise of its own unilaterally dictated basket pricing model and is in complete contravention of that unbundling concession agreement,” said Zalk. “How light or heavy the hand of the state is in reinforcing the 2001 unbundling intent will depend on the behaviour of the private players in recognising the developmental obligations.”
Judge Raymond Zondo’s judgment on the highly politicised court case over the 21.4% Sishen iron-ore mining right makes a similar point, potentially opening the door for a clash between the government and the two companies. “Clause 8 [of the converted mining-right document] makes it a conversion of the old-order mining right that the holder should dispose of all minerals or products derived from the exploitation of the mineral at competitive prices or non-export-parity prices,” it said. “If the minerals are sold to an entity … such purchaser must unconditionally undertake in writing to dispose of the minerals and any products produced from the minerals at competitive market prices.”
At first glance the steelmaker appeared the clear victor last Thursday when Zondo ruled that a mining right could not be subÂdivided or fractionalised under the Mineral and Petroleum Resources Development Act and that Kumba’s subsidiary, the Sishen Iron Ore Company, had full ownership of the right. This left ICT with no claim to the 21.4% right, once held by ArcelorMittal as part of the 2001 unbundling supply agreement. (See “Mining upstart will fight setback”.)
The ruling was interpreted to mean that ArcelorMittal did not have to convert its 21.4% share to a new-order mining right by May 2009 as Sishen Iron Ore already owned 100% and Kumba was not entitled to cancel the cost plus 3% iron-ore supply contract.
Kumba cancelled the contract in February 2010 and renegotiated an interim supply agreement, arguing it no longer had to supply cheap iron ore to ArcelorMittal because the steelmaker had failed to convert its mining right. Peter Leon, head of Africa mining and energy at law firm Webber Wentzel, said: “The judgment doesn’t necessarily engage in a rigorous analysis of the law [but] what is interesting about it is the judge’s observation that the conversion of old-order rights under the Act is not automatic but conditional on satisfying a number of criteria. If any one of these is not met, conversion will simply not happen.”
How things could play out
Scenario one: ArcelorMittal wins the arbitration
If South Africa’s biggest steel producer succeeds in getting the cost plus 3% agreement reinstated, Kumba will still hold 100% of the Sishen mining right and there will be no claw back in terms of reimbursements to ArcelorMittal. It does mean reduced profits — of probably more than R1-billion — for Kumba, though. ArcelorMittal has claim to about six-million tonnes a year of iron ore from Sishen, which had produced 76.7-million tonnes by the end of June.
The value of that is probably less than 10% of Kumba’s revenue. Under the cost plus 3% contract, ArcelorMittal was paying about $20 to $30 a tonne for iron ore, whereas the interim supply agreement, effected in February 2010, forces ArcelorMittal to pay $50 a tonne for iron ore for its hi-tech Saldanha steel plant and $70 a tonne for the inland plants in Newcastle, Vanderbijlpark and Vereeniging.
This is still substantially lower than the $130 to $140 a tonne that Kumba fetches on the international export market. The government, however, could step in with legislative interventions to ensure that ArcelorMittal passes on the cheaper “developmental price” of cost plus 3% to local downstream industries using steel.
Scenario two: Kumba wins
If the Anglo American subsidiary triumphs in its bid, it could opt to retain the interim supply agreement, force ArcelorMittal to pay market-related prices, or negotiate something in between. ArcelorMittal, however, could argue, as it has previously, that it cannot survive operationally with those prices and threaten to scale back its operations in South Africa, shed jobs and even shut down its Saldanha plant.
This would suit the government, which would find a buyer for Saldanha and attach price conditions as a way of reining in ArcelorMittal. The government could also Âintervene on Kumba’s prices domestically by attaching conditions to its mining rights through the Mineral and Petroleum and Resources Development Act.