Kumba halts cheap iron ore to ArcelorMittal SA

Allan Seccombe | Fri, 26 Feb 2010 13:12

[miningmx.com] -- KUMBA Iron Ore's subsidiary Sishen Iron Ore Company (SIOC), told the country's largest steel producer ArcelorMittal SA it will no longer supply iron ore at an extremely beneficial price. ArcelorMittal SA has requested its own shares be suspended from trade on the JSE.

An agreement to sell 6.25 million tonnes of iron ore from the Sishen mine to ArcelorMittal SA at cost plus three percent was put in place in 2001 and has been a source of unhappiness for Kumba ever since. It was put in place when Iscor was divided into a separately listed mining group and a listed steel company. Then-trade minister Alec Erwin was instrumental in setting up the agreement to ensure a sustainable steel producer.

The agreement ensured ArcelorMittal SA was able to secure iron ore more cheaply than its competitors. ArcelorMittal has liquid steel capacity of eight million tonnes/year but only used 5.3 million tonnes in 2009. It recently shelved plans to boost capacity to 10 million tonnes/year.

SIOC said as from 1 March 2010 it would no longer supply iron ore at those beneficial rates but at commercial prices. Kumba CEO Chris Griffith said at a recent results presentation the expectation in the market was for iron ore prices to rise by between 15-50% this year, something ore sales in South Africa would not reflect under the offtake agreement.

ArcelorMittal is paying R204/tonne under the agreement, but under commercial terms this could rise to $100/tonne or R773/tonne in very round terms and using Friday's rand/dollar exchange rate. It will be difficult for ArcelorMittal to source that quantity of iron ore from elsewhere, making Kumba the preferred supplier.

Investec Securities said in a note if the 6.25 million tonnes were sold at export-parity prices Kumba could increase its earnings by and estimated 10% to 15%.

ArcelorMittal has about two months of stocks left and is confident an agreement will be struck in that time, said spokesman Sven Lunsche.

Asked why the agreement was terminated, Kumba CFO Vincent Uren told Miningmx: "Because this is a very poorly drafted agreement." He declined to give further details.

Giving its reasons for the change, Kumba argued ArcelorMittal did not convert its old-order mining rights for the 21.4% stake it owns in the Sishen mine, which entitles it to 6.25 million tonnes of ore a year. SIOC told ArcelorMittal on 5 February that it was "no longer obliged" to sell that amount of ore to them at cost plus three percent but would do so on commercial terms.

ArcelorMittal then told SIOC on 26 Februar it had declared a dispute regarding the matter.

"ArcelorMittal has rejected SIOC's repudiation of the agreement and will institute urgent proceedings against SIOC to enforce the agreement if the appropriate undertakings are not received from SIOC," said the steel maker, which is a division of the world's largest steel producer, ArcelorMittal Group.

"Due to the price sensitive nature of this information, the company has requested that the JSE halt trading until a further announcement is made on Wednesday 3 March 2010," ArcelorMittal SA said.

ArcelorMittal Group holds 52% of the South African company and the South African government is an indirect shareholder, with the Industrial Development Corporation owning 8.8% and the Public Investment Corporation 8.95%.

Kumba said: "SIOC denies that it has repudiated the agreement, and will respond in due course to the undertakings sought by Mittal."

Kumba's shares ended 7.3% higher at R367 each.

The SIOC decision comes soon after an arbitration panel decided ArcelorMittal SA had no right to participate in Kumba's expansion project, the Sishen South project, which means the steel producer has to find alternative sources of ore for its future growth plans.

ArcelorMittal had been depending on receiving four million tonnes of cheap ore from the nine million tonne Sishen South project. “Our focus was on Sishen South, but now that it is out of our reach it does mean our efforts [to find another source of iron ore] need to be redoubled,” Nonkululeko Nyembezi-Heita, ArcelorMittal CEO said recently.

ArcelorMittal spent R15.3bn on raw materials and consumables in 2009. This would be made up of iron ore, coking coal and other ingredients to make steel.

It's not immediately clear what the cost implication will be for ArcelorMittal's production and for its customers, who have, in some cases, complained about the steel maker's pricing structure, high prices and business practices to the competition authorities.

Kumba is 64% owned by Anglo American, which has a large Brazilian iron ore project it is bringing into production. Kumba is said to be fiercely independent and it's understood Anglo has had no role in this decision to charge ArcelorMittal more for iron ore.