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» JSE:KUMBA IRON ORE LIMITED: 26572c

ArcelorMittal blocked on Kumba ore

James Monteiro | Thu, 29 Oct 2009 07:52
[miningmx.com] -- An arbitration panel decided ArcelorMittal SA is not entitled to participate in Kumba's Sishen South expansion project, blocking access to cheap iron ore for the steel maker.

After earlier negotiations about the issue between the two parties yielded no agreement, the case was referred to an arbitration panel consisting of three independent members.

"Kumba shareholders are advised that the arbitration panel has issued an award in favour of the Sishen Iron Ore Company [a Kumba subsidiary] and has determined that Mittal SA is not entitled to participate in the Sishen South project," Kumba said in a statement.

Speaking to Miningmx.com after the announcement, ArcelorMittal SA's company spokesman Sven Lünsche couldn't say where the company would now source the four million tonnes of iron ore it had required from Kumba's Sishen South project in the Northern Cape.

"It's still a bit too early to comment, but we might take the decision on appeal," he said.

The steel group and Kumba, headed by Chris Griffith, already have a deal in place which sees the former purchasing 6.25 million tonnes a year of iron ore from the existing Sishen mine at cost plus 3%, a price it had hoped to fetch in this latest failed agreement.

The amount of iron ore requested by Mittal SA (4 million tonnes) would amount to about half the total output of Sishen South's planned nine million tonnes of annual output.

ArcelorMittal SA in past months has been purchasing less iron ore from Kumba recently. In the six months to end-June 2009, Kumba said its domestic sales had dropped 26% to two million tonnes because of reduced demand by ArcelorMittal SA, a division of ArcelorMittal, the world's largest steel maker.

Kurt Benn, a portfolio manager at Cadiz African Harvest, said ArcelorMittal SA needs to secure additional iron ore supplies as it tries to substitute two million tonnes of ore it sources from the Thabazimbi mine (also owned by Kumba), which is nearing the end of its life.

"ArcelorMittal SA is basing their case on the long term, typically a 20-year horizon," Benn said.

But if Kumba continues with a cost plus 3% model it "would not favour them now" for an array of reasons, for instance the increased cost of electricity, added Benn.

On Wednesday afternoon ArcelorMittal SA was trading down 2.34% at R107.43 per share and Kumba was down 0.91% at R238.50/share.

Broker consensus given by data supply firm McGregor BFA has ArcelorMittal SA on a "sell".