Kumba, ArcelorMittal stand-off heats up

The ongoing contractual dispute between steel giant ArcelorMittal and iron-ore supplier Kumba Iron Ore has descended into all-out war, with South Africa’s steel industry, and the thousands it employs, standing in the firing line.

On Friday, after failing to reach an interim pricing agreement after months of negotiations, Kumba announced that it would no longer be supplying ArcelorMittal with product unless it paid Kumba 48 hours prior to delivery of the ore from the Sishen Iron Ore Company (SIOC), a Kumba subsidiary.

Kumba would also require the steel giant to pay it outstanding amounts for ore delivered between March 1 and July 31 this year, it said in statement.

In response, ArcelorMittal has “initiated plans for the immediate closure of the Saldanha plant, the curtailment of all exports, and a drastic reduction in domestic market production, resulting in market allocation”.

ArcelorMittal CEO Nonkululeko Nyembezi-Heita said she was “profoundly disturbed with Kumba’s decision, as it will have a wider impact on the economy of this country, and will result in definite job losses in our business and the downstream industries. At this stage, I am expecting that about 3 000 to 4 000 jobs will be affected”.

Department of Trade and Industry (DTI) spokesperson Sidwell Medupe said it was seeking to secure an urgent meeting with both parties on Monday.

Earlier this year, Kumba unilaterally declared it would no longer supply ore to ArcelorMittal at a rate of cost plus 3%, as per a longstanding supply agreement between the companies.

The two companies have sought to resolve this dispute, and set up an interim pricing agreement while the matter moved through arbitration proceedings.

According to the statement, the interim pricing proposals put forward by Kumba were that ArcelorMittal would “pay the cost plus 3% portion of the price directly to SIOC, with the [difference] between the cost plus price and the actual market price [‘the differential’] being paid into an interest-bearing escrow account”.

The money in escrow would be paid to the successful party at the conclusion of the arbitration, it said.
Alternatively, Mittal would pay SIOC a price of $50 per tonne for ore to its Saldanha steel plant, and $80 per tonne for ore to Mittal’s inland operations. These prices would escalate by 10% every six months until September 1 2011, following which ArcelorMittal would pay market prices.

ArcelorMittal rejected the second offer, saying that at “$50 per ton, it would have allowed ArcelorMittal to continue operating the Saldanha plant at around break-even levels, but the pricing demand from SIOC for inland facilities is totally unacceptable and would result in the possible closure of these operating facilities”.

It rejected the first option because, said a spokesperson for the steel maker, the price of ore, the real issue, would remain undetermined under this arrangement.

Either way the threatened closures and curtailments in production will have serious implications for the country.

In March ArcelorMittal had instituted a R600/ton surcharge for its customers due to the dispute, which alone had the affect of increasing steel prices by 10%. This provoked a furious response from the DTI, in which it said that it would take ArcelorMittal to the Competition Commission for abuse of dominance and excessive pricing.

Twist in the Tale
At the heart of the dispute, which emerged earlier this year, is a battle over a residual portion of the mining rights to the Sishen iron-ore mine itself.

This residual portion, formally the backbone of ArcelorMittal’s supply agreement with Kumba, was awarded to a little-known company called Imperial Crown Trading 289 (ICT), as a prospecting right, late last year.

The decision was made under suspicious circumstances, and is currently the subject of both an internal review by the Department of Mineral Resources, as well as a review in the high court.

ICT is linked to the ruling ANC, with directors that include Gugu Mtshali, girlfriend to Deputy President Kgalema Motlanthe.

Previously Kumba held the majority share of the mining rights, while ArcelorMittal held a residual stake of just more than 20%.

This arrangement, a result of the unbundling of state-owned mining and steel giant Iscor, entitled ArcelorMittal to iron ore from Sishen at a rate of cost plus 3%, well below market prices for iron ore.

The plan, endorsed by government, had been to ensure that ArcelorMittal would pass on this saving to the local stream steel industry.

ArcelorMittal has, however, long been criticised for failing to do so.

Under mining legislation the rights had to be converted from old-order rights to new-order rights by April last year. Kumba converted its portion to new-order mining rights, while the residual portion was allowed to revert back to the state. Kumba applied to the state for the residual portion, only to find that ICT had managed to snaffle it up.

Both the review and the high court application have yet to be completed.

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