[miningmx.com] -- ON the strength of an archaic arrangement, ArcelorMittal South Africa has for almost a decade been receiving iron ore at cost price from Sishen, one of the world's most coveted iron-ore mines.
ArcelorMittal will struggle to find sympathy now that Kumba has pulled the rug from under its feet by unilaterally suspending the agreement last month.
The steel manufacturer has been making super-profits out of the agreement and has not passed a single cent of the profits on to the South African consumer.
The agreement was an attempt at market manipulation by Alec Erwin, the former Minister of Trade & Industry, and his ally, Khaya Ngqula, the then chief executive of the Industrial Development Corporation (IDC). Yes, the very same Ngqula who left South African Airways under a cloud last year.
After the privatisation of Iscor and the listing of its
shares on the JSE in 1989, the share never really raised its head because Iscor was both steel manufacturer and a mining company.
It was eventually decided to unbundle the mining operations from Iscor and list them separately as Kumba Resources in 2001.
But Iscor and the IDC at that stage were in a tight spot - the collapse of the steel market necessitated building Saldanha Steel.
This is a stainless steel plant that Iscor and the IDC, as equal partners, began to build in 1995 the better to exploit Sishen's valuable iron ore before it was exported.
Saldanha Steel began producing in 1998 - in the heart of the Asian financial crisis which sent steel prices tumbling. By 2001, when Kumba Resources was unbundled, Saldanha Steel was sitting with net debt of R5.8bn on its books.
This debt was transferred to Iscor and Kumba Resources in exchange for shares, while Iscor, which at that stage owned 50% of Saldanha Steel, also received the
other 50% from the IDC.
Behind the scenes a powerful struggle was being played out about a ruling by Erwin and Ngqula: that Iscor should receive its iron ore from Sishen at cost price.
A source that was closely involved at the time points out that this made no sense. The reason was that Erwin and Ngqula wanted the South African economy to benefit from lower steel prices but, as everyone knew, the opposite has actually happened.
Another reason was that Saldanha Steel had to be refinanced by a new investor whom it would be difficult to persuade while the fairly new world-class plant was saddled with debt of R5.8bn. At that stage Saldanha Steel was producing steel at a loss of $91 a ton.
Iron ore, the sought-after lump ore mined at Sishen, at that stage fetched between $15 and $18 a ton on global markets.
According to the source, one of the proposals made was for the ore to be delivered to Iscor at
market-related prices minus the cost of railing it to Saldanha, or minus the road transport cost to Iscor's other plants in Vanderbijlpark and Newcastle.
This would mean that Iscor would still receive the ore at a discount of about $5 a ton, while the new Kumba Resources would continue to benefit somewhat from possible increased iron-ore prices. But this was unacceptable to Erwin and Ngqula.
Iscor and the IDC, the biggest shareholder in Iscor, were involved in discussions with Lakshmi Mittal and his son, Aditya, about the sale of the IDC's shares in Iscor, as well as ways in which Mittal Steel could progressively take over Iscor.
Iron ore at cost price from Sishen was obviously an irresistible inducement for the Mittals.
The unbundling transaction was written in such a way that Kumba would never be able to extricate itself from it. Iscor received an indivisible 21.4% stake in the Sishen ore deposit. This gave it the right to 6.25m tons of
Sishen?s iron-ore production price plus 3%.
The cost price was defined as the running costs of mining, and the additional 3% was to cover additional costs such as administration and overheads. Kumba would therefore make no profit from the 6.25m tons of ore it was obliged to deliver to Iscor, now ArcelorMittal.
To make matters worse, in 2005 Mittal Steel succeeded in acquiring Kumba's only foreign ore deposit, the Faléme iron ore deposit in Senegal.
That country's president, Abdoulaye Wade, unexpectedly declared that Kumba was not developing the iron deposit quickly enough and he re-allocated the rights to Mittal Steel.
And two years ago, when Kumba decided to develop its new mine, Kolomela (formerly Sishen South), ArcelorMittal equally brazenly demanded that it had to have a 21.4% stake in this mine as well. An arbitration panel recently decided that ArcelorMittal was not entitled to this.
Iscor/ArcelorMittal has since been skimming the cream off the top. In 2004 its operating profit was R6.7bn, in 2005 R6.8bn, in 2006 R6bn, in 2007 R7.7bn and in 2008 R12.1bn.
South Africans have never benefited from a cheaper steel price than the international market price. The steel giant has in fact spent many hours before the Competition Tribunal over unilateral and unfair steel price increases.
It's difficult to say what will happen now. From Monday Kumba refuses to deliver ore to ArcelorMittal at anything other than the commercial price.
On Friday Kumba spokespeople declined to say whether the steelmaker would continue supplying ore from Monday if no agreement was reached.
ArcelorMittal has the capacity to consume 8m tons of ore a year, but in 2009 took only 5.8m tons of Sishen ore owing to the slump in steel demand.
The fact that Kumba was able to sell the additional ore on the global market boosted its financial position
during the recession, but it does not have the output and harbour capacity to export the full quota that it has always delivered to ArcelorMittal.
The two will therefore have to come to some agreement.
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