/ 13 August 2010

How Amsa outwitted DTI

Steel giant ArcelorMittal South Africa (Amsa) appears to have found a political solution to its commercial problems by announcing two deals involving controversial Imperial Crown Trading (ICT).

ArcelorMittal will buy ICT for R800-million if it is able to convert its prospecting rights at Sishen to full mining rights in its contested battle with iron ore giant, Kumba.

It has also announced a BEE deal in which ICT’s politically connected shareholders feature prominently.

ArcelorMittal has fought a low-intensity war with the government, which has been keen to see it pass on the benefits of the special developmental pricing it enjoys in securing cheap iron ore, such as from the giant Sishen mine. Its special pricing deal with Kumba’s Sishen Iron Ore Company, intended to help supply the country with cheap steel, has been worth as much as R5-billion a year to the steel giant, according to one analyst.

But ArcelorMittal has responded with aggressive pricing, which has seen it in an ongoing conflict with the authorities and has to date not moved to bring in empowerment shareholders.

Frustration with Arcelor-Mittal led the government earlier this year to threaten forced divestiture of its assets as a means to bring it to book.

An analyst, who asked not to be named because of the political sensitivity of the matter, said that, by dealing with ICT, Amsa had legitimised an underhand process.

Drawn fire
The deals with ICT have drawn fire because ArcelorMittal is seen to be siding with a party that secured these rights under irregular and possibly illegal circumstances. ICT won the right to prospect on an existing mine, one of the world’s largest.

President Jacob Zuma’s son, Duduzane, is a primary beneficiary of the ArcelorMittal deals with ICT, as are the Gupta family, who are known to have close links to the president.

The Guptas are already very wealthy and, as natives of India, are not previously disadvantaged.

While the deal will leave Amsa empowered, the inclusion of ICT, Zuma and the Guptas in the empowerment transaction has undermined real transformation in the sector, critics complain.

The Mail & Guardian has confirmed that ANC national chairperson Baleka Mbete pulled out of the deal.

“I was approached with an offer to participate; I declined. The deal’s structure was outside the investment philosophy and criteria of our women’s group,” Mbete said.

She did not specify which women’s group she was referring to.

But it is understood that Mbete was talking to ArcelorMittal before the ICT controversy broke, and that she and her group withdrew only last week.

Earlier this year it was announced that ICT had been awarded the prospecting right to a 21% residual portion of mining rights in Sishen, which had reverted to the state in 2009.

ArcelorMittal, the former owner of the rights, failed to convert them to new order rights, as required under the Mineral and Petroleum Resources Development Act.

The share was critical to a supply contract between Amsa and Kumba, whereby Amsa was entitled to more than six-million tonnes from Sishen at cost plus 3%.

When the rights reverted to the state, Kumba demanded that Amsa buy iron ore at market prices.

While this dispute is now subject to arbitration, it led to Amsa instituting a R600/tonne surcharge on its products.

The Department of Trade and Industry (DTI) was so incensed by the Sishen surcharge that it took the matter to the Competition Commission, which is investigating it.

The surcharge, which ran between May and August this year, was halted when Kumba and Amsa came to an interim pricing agreement pending arbitration.

Rob Davies, the trade and industry minister, refused to comment on the particulars of the deal, but said the ministry intended to ensure a competitive steel price and a local manufacturing industry. The ministry also wanted to ensure that some of the iron ore from Sishen would be made available at concessionary prices for local steel manufacturing.

Analysts view the Amsa deal as commercially savvy, if unpalatable.