Govt shifts iron-ore emphasis from corporate rights to national interest

The South African government moved on Thursday to further shift the emphasis in the ongoing dispute between Kumba Iron Ore (KIO) and ArcelorMittal South Africa (AMSA) beyond the realm of corporate and legal rights, to one that was also sensitive to South Africa's national interests.

The State's bid to influence the tone of the discussion began in earnest last Friday, when Trade and Industry Minister Dr Rob Davies made a public offer to mediate in the escalating conflict - this after AMSA threatened to shut capacity and retrench up to 4 000 of its 10 000 workers should KIO proceed with a pay-and-take pricing model as from August 1.

The strategy was further consolidated by Monday's "constructive engagement", which involved Davies, Mineral Resources Minister Susan Shabangu, Economic Development Minister Ebrahim Patel, as well as AMSA CEO Nonkululeko Nyembezi-Heita and KIO CEO Chris Griffith. After the Pretoria meeting, government said that all the participants had committed themselves to reaching an agreement that would "put the country first".

However, Engineering News Online understands that government and the governing African National Congress have, for some time, been considering ways to intervene, particularly owing to the fact that the dispute had the potential to undermine government policies in the area of minerals beneficiation and industrialisation.

That opportunity arose when the tussle threatened to spill over beyond the steel industry at the very moment when government had reach internal alignment around its developmental goals in the area of steel pricing - a process that seemingly was given impetus by public disquiet over the Department of Mineral Resources (DMR) decision to grant prospecting rights at Sishen to a little-know, yet well-connected, resources company.

In a statement issued jointly by Davies, Shabangu and Patel on Thursday, government moved to reinforce its position, which was reportedly also canvassed at the Cabinet lekgotla, by noting that an interim pricing resolution between AMSA and KIO had not resolved "critical issues arising from the dispute".

Earlier in the day, KIO and AMSA announced that they had agreed to an interim pricing agreement, retrospective to March 1, 2010, that would endure until July 31, 2011, while dispute settlement processes were pursued.

AMSA would pay a fixed $50/t of iron-ore delivered to Saldanha Steel, and $70/t for iron-ore delivered to AMSA's inland plants. AMSA would be entitled to purchase a maximum of 520 000 t/m, with a maximum of 125 000 t/m for Saldanha Steel. Any additional tonnage would be procured at the prevailing spot price, based on export parity prices.

In its statement, government stressed that the 2001 unbundling of Iscor, while having been pursued under the now commercial contract, had also involved two core public developmental obligations:
- To ensure the viability and cost competitiveness of local steel production; and
- To ensure a competitive steel pricing regime to support the development and deepening of value-added manufactured products in downstream industries.

Such "developmental outcomes" were in the "national interest", government said, adding that they were also "critical to the success of the Industrial Policy Action Plan and a shift to a new more labour-absorbing growth path".

CONDITIONS & TAXES?

"Government will use all tools available to it to ensure that these outcomes are realised," Davies and Patel warned.

Engineering News Online understands that government will consider attaching conditions to the eventual granting the Sishen mineral rights, insisting that the iron-ore is used to support a competitive steel industry, which, in turn, passes these benefits on to steel consumers.

Also under consideration, is the imposition of export taxes on locally-mined iron-ore to further encourage beneficiation.

The Ministers said that a meeting would be held with stakeholders soon to assess the impact of the interim settlement on these long-term developmental objectives.

The Ministers would also seek to ensure that the settlement did not have a negative impact on the steel price in the short run and that in the long run the rents arising from South Africa's mineral resources are used to develop the economy.

SURCHARGE TO BE DROPPED?

Davies had already lodged a formal complaint with the Competition Commission over AMSA's recently-instituted iron-ore surcharge.

There were strong indications on Thursday that the controversial Sishen surcharge, which was implemented to part recovery the increase in iron-ore prices, would be withdrawn in the wake of the more hands-on approach being adopted by government.

An announcement was expected before the monthly price adjustments were announced, which are typically released to customers on the last working day of each calendar month.

No mention, however, was made about whether a second settlement might be in the offing between the Department of Mineral Resources (DMR) and KIO over the DMR's granting of AMSA's "lost" rights at Sishen to Imperial Crown Trading as "prospecting rights".

DMR is reviewing whether the award was made properly following a complaint lodged by KIO. But that company had also instituted separate legal proceedings against the department as a further safeguard.

The case, which involves some politically well connected South African business people, is being closely watched by the international resources industry, which is concerned that the DMR's actions, which some hold were unduly influenced, could impact the security of other mineral rights in the country.

Source engineeringnews.co.za

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Minister moves to save Saldanha Steel plant

Minister of Trade and Industry Rob Davies was meeting ArcelorMittal and Kumba today to try to ward off a threat to close Saldanha Steel with thousands of jobs at stake.

His spokesperson, Sidwell Moloantoa Medupe, confirmed that Davies had requested the meeting after Kumba's announcement on Friday that it would stop supplying iron ore to ArcelorMittal SA steel plants unless it agreed to new terms and conditions.

ArcelorMittal said it would have to shut Saldanha Steel with the immediate loss of 4 000 jobs.

Kumba, a unit of Anglo American, said on Friday that it would make the steelmaker pay for ore in advance from next month after ArcelorMittal rejected proposed new pricing systems.

ArcelorMittal said: "(We have) no alternative but to immediately initiate plans for the immediate closure of the Saldanha plant, for the curtailment of all exports, and for a material reduction in domestic market production."

ArcelorMittal said the Kumba proposals would severely harm its profitability and it could not agree to them on an interim basis or otherwise.

Saldanha produces 1.2-million tons of steel a year.

In February, Kumba, the world's 10th largest iron ore producer, terminated the long-term deal under which it sold ore to ArcelorMittal at a discount and said it would charge market rates from March.

The Department of Trade and Industry has offered to mediate between the two.

"The DTI will be assessing all options available to ensure that in the event of a failure of the parties to reach a responsible settlement, the economy does not suffer negative consequences," said Medupe.

The provincial government also said it was watching the matter closely.

Tammy Evans, the spokeswoman for Economic Development and Tourism MEC Alan Winde, said it would assist where it could.

"We hope that the two parties can resolve this commercial dispute swiftly," she said.

Meanwhile, the provincial cabinet has approved the drawing up of a feasibility study for an industrial development zone (IDZ) in Saldanha Bay.

The provincial government believes that with its deep-water port, iron ore terminal and mega-smelters, Saldanha Bay is an area of major international significance in terms of industrial potential.

Winde said that between 1999 and 2008, Wesgro (the investment and trade promotion agency for the Western Cape) had been approached by several proponents of large-scale projects.

These included aluminium smelters, titanium processing plants, large-scale chemical plants and steel processing.

"But the lack of co-ordination and planning by the municipality and provincial government has mitigated against any of these opportunities being able to be developed," said Winde.

A pre-feasibility study towards the end of 2008 covered IDZ profiling and development zone location, Saldanha's economic profile, the local market profile, an industrial market analysis and a physical environment assessment.

A draft of the study was completed in September, and the report and the task team agreed on five potential clusters:

Oil and gas servicing;

Minerals processing;

Renewable energy production and manufacture;

Steel processing; and

Ship repair.

Winde said key issues included the need for an overall environmental management framework to determine the critical limits to development, the requirements of additional bulk water and the need to upgrade power distribution lines.

The report identified 3 000 hectares that could form the IDZ.

The feasibility study is expected to be completed by next March.

Source .iol.co.za

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A review of spoilt brat Arcelor's rights is in order

It seems that the lighter ArcelorMittal South Africa's legal case becomes, the louder are its threats. Its latest - to close its Saldanha Steel plant and stop all steel exports - smacks of the sort of churlish behaviour one would expect of a spoilt child. And spoilt child is pretty much the status that ArcelorMittal SA has enjoyed for most of its stay in South Africa.

The extent of the current mess may be a reflection of the desperate situation the government found itself in with Iscor in the mid-1990s and in particular with Iscor's plant in Saldanha Bay. Despite the injection of oodles of funds by the Industrial Development Corporation (IDC) and Iscor, Saldanha just kept leaking money.

The decision to split Iscor into two parts - comprising steel manufacturing and iron ore mining - was crucial to the steel group's prospects. The decision that Iscor would access cheap iron ore from the Sishen iron ore mine was also critical to Iscor's initial prospects and specifically to the Saldanha mill.

Legend has it that the government was also keen to prise control of the group out of Afrikaner hands, which may have seemed reasonable at the time given Iscor's profit record. And so we all ended up with an international group, ArcelorMittal SA, getting cheap access to the country's dominant steel group and to a seemingly unending supply of cheap iron ore. The new owner charges maximum prices in its determination to ensure an efficient operation. The benefits of these efficiencies are passed directly to its shareholders.

Right now what is most puzzling is ArcelorMittal SA's explanation that it did not renew the iron ore rights because it believed that was Kumba's responsibility. Given the importance of the rights this seems an inappropriately relaxed stance by the steel maker.

And given the talk of closing Saldanha, perhaps it is time to review the divestiture suggestions mentioned by the competition authorities a few years back.

Source busrep.co.za

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ArcelorMittal SA seeks quick end to row with kumba

The South African unit of ArcelorMittal, the world's largest steel maker, on Tuesday said it was cooperating with Kumba Iron Ore to expedite a prolonged dispute over iron-ore supply amicably.

ArcelorMittal South Africa also said steel prices were set to rise on recovery of global demand, restocking and a boom in South Africa's economy, particularly in the construction industry.

"We are co-operating (with Kumba) to take the matter to arbitration," Nonkululeko Nyembezi-Heita, CEO of ArcelorMittal South Africa, said at a meeting for shareholders.

She later declined to provide further details to Reuters.

Kumba, a unit of global miner Anglo American, terminated the preferential pricing deal with the steelmaker, claiming that the company had failed to renew its mining rights in Sishen mine as per South African mining laws.

Kumba supplies ArcelorMittal from the Sishen mine.

"We remain firmly optimistic that the supply agreement (with Kumba) is valid and we are taking necessary steps to protect our rights," Johnson Njeke, the unit's chairman said at the same meeting.

Nyembezi-Heita later told Reuters that the refusal by Zimbabwe President Robert Mugabe to allow ArcelorMittal to take over the country's Zisco Steel, was a lost opportunity to show foreign investors Harare was changing its policies.

"What Zisco would have offered us was a presence in a part of the world where we could service landlocked neighbouring states, plus participating in the rebuild of Zimbabwe as a country, obviously now we have lost that," she said.

"But we haven't lost the strategy and ambition for our Sub-Saharan footprint," Nyembezi-Heita said.

Nyembezi-Heita said ArcelorMittal South Africa planned to grow its market within Sub-Saharan Africa in countries like Zambia, Namibia, Botswana and also Ghana.

Nyembezi-Heita said the global economic climate had improved and that she saw this supporting prices.

"We are seeing prices being traded up and up. There is also restocking and a rebound in steel demand," Nyembezi-Heita said.

Edited by: Reuters

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Steel prices increase Saldanha Steel will benefit, but not the consumer.

JSE-listed steel producer ArcelorMittal South Africa (AMSA) confirmed to Engineering News Online on Monday that the price of flat and long steel for delivery from June 1, 2010, would increase by between 2% and 17%, depending on product type – news of the increase was met with anger by steel consumers.

The June increases would be over and above the R600/t surcharge instituted from May 1, 2010, as part of a bid by AMSA to mitigate against the impact of a possible surge in iron-ore costs, precipitated by the cancellation of a favourable supply agreement with Kumba Iron Ore's (KIO's) Sishen Iron Ore Company (SIOC).

SIOC cancelled a long standing cost-plus 3% deal in February, citing AMSA's failure to convert a 21,4% undivided share of the mineral rights at the Sishen iron-ore mine, in Northern Cape province, as is required by South African mining legislation, as the reason for the decision.

The matter is currently the subject of a corporate dispute, which should go before an arbitration panel later this year, but which, in AMSA's view, could take up to 18 months to resolve.

In the interim, AMSA is being invoiced on commercial terms, but is only paying at the cost-plus 3% level. It is placing the proceeds of the surcharge into an escrow account, marked as a contingent liability in its accounts, pending the outcome of the arbitration process.

AMSA has confirmed that the difference between the cost-plus 3% invoice and the commercial invoice received in March was a whopping $100/t on the 350 000 t received from SIOC in March.

Should AMS prevail in its dispute with KIO, it has promised to reimburse consumers. But it is unclear how far down the supply chain such a reimbursement could feasibly reach, owing to the fact that many end consumers buy their steel from traders, or merchants.

The Department of Trade and Industry (DTI), which referred AMSA to the Competition Commission when the surcharge was announced, claiming that it amounted to abuse of dominance, has also questioned how the proposed reimbursement could feasibly be implemented.

The June increases, which were communicated to customers over the weekend, were also the first "base" price rises on domestic carbon steel this year, with prices having been rolled over since December 2009.

In fact, the steel group cut prices in November, having increased prices between July and October, when international selling prices began recovering from their precipitous recession-linked declines of late 2008 and early 2009. Prior to July, the price of some steel products sold domestically fell by as much as 60% from the record levels achieved during the first half of 2008.

In the flat-steel segment, plate prices were set to increase fastest from June, at around 17%, while galvanised steel would increase by a more modest 4%. Prices in the more competitive long-steel environment would rise by between 2% and 4%, depending on product type.

AMSA insisted on Monday that it was continuing to set domestic selling prices on the same basket formula that it had been using since moving away from import-parity pricing earlier in the decade.

Prices are set after analysing domestic prices in four markets (the US, Germany, Brazil and China) and adjusting these to its expectations for the South African currency for the forthcoming month - the weaker the currency outlook, the higher the steel price. The South African currency was one of the best performing in the world during 2009, and showed continued resilience during the first quarter of 2010.

DOWNSTREAM ANGER

Downstream steel users were equally outraged by the surcharge and by the prospect of the base price increasing in June.

Africa Cellular Towers (ACTOWERS) GM for the powerlines division Nick van der Meschttold Engineering News Online that the increases would place untenable pressure on the company's manufacturing unit.

He said that it had reached a point where it was cheaper to import finished product from India and China than to source the steel, which comprised some 70% of the cost of the final product, locally. The company designs, manufactures and installs towers for the cellular industry, as well as for the power transmission and distribution market.

He said it was also unclear whether it would be able to pass on the surcharge to its customers, owing to the uncertainty as to whether the surcharge could be reflected in the cost price adjustment (CPA) index complied by the Steel and Engineering Federation of South Africa. "If it's not in the CPA index, then we are going to lose money automatically," Van der Mescht said.

A steel trader canvassed by Engineering News Online said that there was also uncertainty as to whether the surcharge would be maintained at R600/t, or whether it too was subject to adjustment, along with the spot iron-ore price.

Another steel consumer told Engineering News Online that there could be no justification for the surcharge, owing to the fact that it was an attempt by AMSA to recover the costs brought about by its own "corporate neglect" in failing to convert its Sishen mineral rights.

Speaking on condition of anonymity, the consumer argued that promised of the surcharge reimbursement was "entirely unsatisfactory", as the proceeds would, in most cases, flow to the merchants rather than to the end-consumer.

Van der Mescht added that ACTOWERS did not believe "for one second" that it would recoup the cost of the surcharge, adding that the immediate cash flow effect on its manufacturing unit was devastating. He said that its facility had the capacity to convert 3 000 t/m of steel, but that it was currently operating well below that level.

AMSA said last week that it was in the "process of evaluating various alternative options to determine the most appropriate mechanism to implement such a refund in consultation with its customers for the benefit of the steel industry in South Africa".

Source http://www.engineeringnews.co.za

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ArcelorMittal in Saldanha Bay could face price increase for iron ore

Details of an "interim pricing arrangement" between iron-ore belligerents ArcelorMittal South Africa (AMSA) and Kumba Iron Ore (KIO) are expected to be concluded in the near term, with detailed discussions on the finer details reaching maturity. Further, an update on the progress regarding the channel through which the two companies would seek to resolve their dispute could also be communicated within days or weeks.

But neither company was willing to elaborate further on Friday on the surprise move by the Department of Mineral Resources (DMR) to grant a prospecting licence in relation to AMSA's "lapsed" 21,4% undivided share of the Sishen mine, which is operated by Sishen Iron Ore Company (SIOC), which is 74% held by KIO.

KIO has indicated that that it is pursuing its objection to the granting of the right to the little-known Imperial Crown Trading 289 on the basis of the appeal process prescribed in the Mineral And Petroleum Resources Development Act (MRPDA).

It is particularly perplexed by the granting of a prospecting right on a property that has housed an operating mine since 1954, and on the basis of a right that was effectively for an undivided share of the mine.

Both Imperial Crown and SIOC apparently applied for the rights on May 4, 2009, after AMSA failed to convert its rights by the April 30, 2009, deadline, outlined in the Act. But it emerged on Thursday that, despite its application for prospecting and not mining rights, the Imperial Crown application had been favoured by the DMR.

It has since emerged that the company has material links to the African National Congress, South Africa's current governing party.

But the a DMR spokesperson told Engineering News Online that the application for, and the issuance of, the prospecting right were done strictly in accordance with the law, and that a statement explaining the decision would probably be issued early next week.

AMSA, meanwhile, would not comment further on the matter, saying only that it was considering all its legal options, having insisted previously that its rights and an associated supply agreement remained intact.

The supply agreement, which was concluded as part of the 2001 unbundling of the then Iscor, was meant to be a 25-year, but "evergreen" deal guaranteeing AMSA access to 6,25-million tons a year of Sishen ore on a cost plus 3% pricing formula.

However, SIOC notified AMSA on February 5, 2010, that the contract was no longer valid, owing to the steel group's failure to convert its Sishen rights in line with the prescripts of the MRPDA.

PRICE NOT, SUPPLY THE, ISSUE

Material continues to flow from the mine to AMSA's South African mills, with discussion continuing on what price would be charged as from March 1, 2010, onwards - the date on which SIOC "cancelled" the discounted price agreement.

KIO told Engineering News Online that it had not yet invoiced AMSA for March deliveries.

It is widely understood that SIOC is proposing that the interim supply be priced on "commercial terms", with a possible clawback agreement should AMSA prevail during any dispute-resolution process.

In other words, AMSA will be asked to begin paying the yet-to-be-agreed price, which would be materially more than current estimates of between $26/t and $35/t. But SIOC might only redeem what was owing to it in relation to the cost plus 3% arrangement, with the balance going into a separate account.

SIOC would be entitled to the difference should its argument be accepted during arbitration. However, it is not yet certain that the matter will in fact go to arbitration, with both companies still weighing the legal options.

In other words, both parties are treating the award of the prospecting rights to Imperial Crown as separate to their commercial dispute, which resulted in a halt in the trading of AMSA stock, between the afternoon of February 26, 2010, and the afternoon of March 3, 2010, when it was first disclosed.

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Source www.engineeringnews.co.za

ArcelorMittal in Saldanha Bay could be facing iron ore supply problems.

Kumba Iron Ore appears to have dealt steel giant ArcelorMittal South Africa another body blow in the ongoing battle between the two companies.

The Mail & Guardian understands that Kumba has applied for a 21% share in the mining rights to the Sishen mine, which lie at the heart of the corporate bun fight.

The matter is being closely watched as it ultimately goes to the heart of steel pricing in the country and could affect manufacturing and jobs.

Neither company would comment, but they are understood to have entered arbitration to resolve the dispute. To add to ArcelorMittal’s woes an industry insider speculates that the government’s dissatisfaction with its steel pricing, as well as its lack of empowerment status, has left it with little sympathy in the corridors of power.

If Kumba is granted ownership of the minority portion of the rights, which ArcelorMittal held and failed to convert into new order mining rights, this could give Kumba the leverage it needs to force a better price for the 6.25-million tons of iron ore that it supplies to Arcelor-Mittal each year, according to analysts.

The rights have since reverted to the state. “The holder of the right was meant to apply for conversion before April 2009 and they [ArcelorMittal] failed to do so,” said Jeremy Michaels, a spokesperson for the department.

How Kumba’s application will be received is unclear. The department viewed the issue as a dispute between “two private companies”, said Michaels. DMR would not comment on any applications for the rights.

Under a contract negotiated through the unbundling of the state-owned Iscor in 2001 -- which resulted in the creation of what became Kumba Iron Ore, its ironore mining arm, and ArcelorMittal South Africa -- ArcelorMittal, because of its share of the mining rights in Sishen, would receive 6.25-million tonnes of ore from the Sishen mine at cost plus 3%.

The mining rights, viewed as undivided, are 79% owned by Kumba through its subsidiary the Sishen Iron Ore company, with the minority share or 21% lying with ArcelorMittal. ArcelorMittal paid R2.5-billion at the time for the rights to Sishen and the 6.25-million tonnes of ore a year at cost plus 3%

On February 26 ArcelorMittal suspended trading of its shares after Sishen notified the company on February 5 that it would no longer be supplying ArcelorMittal with ore at the preferential price, but rather at market-related prices.

It is understood that Kumba viewed ArcelorMittal’s failure to convert its share of the mining rights as an opportunity to amend the deal unilaterally. A prior arbitration ruling on a related matter is believed to have given it the impetus to do so.

In the development of the Sishen South project -- an extension of the Sishen mine -- ArcelorMittal had assumed a matching arrangement (cost plus 3%) on the output of Sishen South. Kumba disputed this.

The matter went to arbitration and late last year it was ruled that, because ArcelorMittal did not own the mining rights in this matter, it was not entitled to a similar deal.

But ArcelorMittal is understood to take a different view, which is that, on the division of the Sishen mining rights, Kumba, owning the majority share, would deal with the regulatory issues, including mining-rights applications and conversions. Mittal re-opened trading of its shares last week, with a reported 23% drop in the price.

The very sweet price granted to ArcelorMittal has been a sore point for the South African government.

On Iscor’s unbundling, facilitated by the department of trade and industry, under Alec Erwin, the price granted was, in part, aimed at locking in lower costs for the local steel industry and ensuring its competitiveness. But ArcelorMittal has been accused of not passing on the benefits of these prices to local customers.

Instead, it opted to benchmark its price against a basket of countries, which critics argue is closer to import prices and ensures Arcelor- Mittal retains extensive profits. Its pricing saw the company being dragged to the Competition Tribunal and slapped with just under R700-million in fines. But it challenged the ruling and subsequently settled with the complainants.

ArcelorMittal has long denied the accusations, citing rebates to customers that allow them to export competitively as one example of the support it provides to customers.

According to Matt Brenzel, portfolio manager at Cadiz Securities, a victory for Kumba might not affect local steel prices. Instead, a better price for Kumba would ideally affect only ArcelorMittal’s profit margins.

Brenzel estimated that ArcelorMittal was receiving ore from Sishen at roughly R125/tonne. Compared with an export parity price of around R475/tonne ArcelorMittal stood to earn more than R2-billion a year from the deal.

He noted that if Kumba did get ArcelorMittal’s share of the rights, the company would achieve little besides room to negotiate for a better price.

In terms of off-take, ArcelorMittal was the only real customer that Kumba had for the ore, given the constraints on the rail line to transport ore to Saldanha Bay for export, he said. Aside from pricing issues Arcelor-Mittal’s failure to strike an empowerment deal is also seen as an irritation to some sectors of government.

ArcelorMittal is one of the largest suppliers of steel to a number of companies, including mining houses. Under the mining charter, companies are expected to procure goods from BEE-compliant suppliers.

One industry insider argued that, with ArcelorMittal being one of the largest suppliers of such a key input, it has meant the transformation performance of miners is looking increasingly bad.

ArcelorMittal had apparently planned to undertake a BEE deal but this was put on hold because of the financial crisis and the recession that followed.


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