[miningmx.com] — KUMBA Iron Ore (Kumba) and ArcelorMittal have settled their dispute over interim pricing arrangements for the supply of iron ore from Kumba’s Sishen mine to the steel producer.
In terms of the settlement Kumba has agreed to drop the price it had demanded for the supply of iron ore to ArcelorMittal’s inland plants to $70/t from the initial $80/t.
The price for delivery to the steelmaker’s Saldanha plant remains unchanged at $50/t.
The settlement follows the intervention of Trade and Industry minister Rob Davies after the dispute escalated dramatically last week when Kumba demanded that ArcelorMittal accept its terms or effectively pay on a “cash up front’ basis for iron ore supplies with effect from August 1.
ArcelorMittal’s response was to threaten the closure of its Saldanha plant as well as to cut domestic steel production putting up to 4,000 jobs at risk.
ArcelorMittal CEO Nonkululeko Nyembezi-Heita commented on Thursday that, “as a result of the conclusion of an interim agreement we are pleased that we will be in a position to continue the Saldanha plant operations with the current employee complement that is in place.
“Our current export order programme will continue but the viability thereof will depend largely on steel prices and exchange rate variations, which will be monitored on a continuous basis.’
There will be no escalation in the prices agreed for the duration of the interim period which started on March 1 and will expire on July 31 2011.
During this period arbitration between Kumba and ArcelorMittal to settle the underlying dispute over the status of ArcelorMittal’s long-term supply contract with Kumba will continue.
Kumba had refused to continue supplying ArcelorMittal at the prices specified in that contract while arbitration was underway.
Analysts say the agreement provides an immediate profit uplift to Kumba equal to about R2.5bn comprising of R2.1bn which it would derive for iron ore supplied to ArcelorMittal’s inland plants and R400m from the Saldanha mill.
On a pretax earnings basis, this is equal to a 15% and 7% increase for the 2010 and 2011 financial years respectively.
The new pricing agreement is, however, also applicable retrospectively from March 1 which from that date means an additional R88.5m from Saldanha and R460m from the inland steel mills. Up until now, ArcelorMittal was only paying cost +3% for Kumba’s iron ore.
Daniel Malan, a portfolio manager for Re:CM, said the value transfer between the companies, the difference between the rise in Kumba’s share price and decline in ArcelorMittal’s, was about R15bn to R20bn.
In mid-afternoon trade, shares in Kumba were 5% higher trading at R380.94/share, a gain of 21.7% since the start of July. ArcelorMittal’s share price was 4% higher at R82,38/share. It had gained 14% from the beginning of the month but off a precipitous share decline of some 29% since March.
Malan also suggested ArcelorMittal would find it difficult to absorb the increases in iron ore prices. “This could be damaging for the western Cape economy if you think it only has Saldanha Bay, Duferco (which rolls Saldanha’s slabs) and Namakwa Sands, while they’re also thinking of taking the casinos away,” he said.
Additional reporting by David McKay.
