Steel giant gets the shaft

2010-03-06 08:51

THE dramatic thawing of relations between ArcelorMittal SA and its biggest iron ore supplier masks years of discomfort between the two giants over the 2001 sales contract from the Sishen mine.

A research note published this week by Macquarie First South ­analysts David Pleming and ­Avishkar Nagaser predicts that ArcelorMittal SA’s profit could drop by 50% if Kumba Iron Ore charged the full market price for its iron ore, while Kumba’s earnings could ­receive a 15% boost.

Analysts say ArcelorMittal SA was paying R200 a ton for the 6.25 million tons of iron ore it received from Kumba annually instead of the ruling market price of around R700 a ton.

If ArcelorMittal SA was forced to pay R700 per ton, this would increase iron ore costs by R3.1 billion for the steel manufacturer.

An insider says Anglo, Kumba’s parent company, has been trying to review this contract for years. ­Anglo attempted the review after ArcelorMittal SA broke the spirit of the agreement. The company was getting iron ore, a major ingredient in steelmaking, cheaply while ­selling it to local users in dollar­ denominated prices.
The insider says attempts at mediation drew a blank because ArcelorMittal SA was not keen on revisiting a legitimate contract. The contract has made truck-loads of money for ArcelorMittal, the company owned by India-born billionaire Lakshmi Mittal. But the power dynamics shifted last week when Kumba announced that it was cancelling the contract and suggested that it would charge ArcelorMittal SA commercial prices.

Kumba was emboldened by ArcelorMittal SA’s failure to convert its 21.4% old order mineral rights on the Sishen mine into new order mineral rights. The deadline for the conversion was April 30 last year.

Kumba Iron Ore chief financial ­officer Vincent Uren was quoted in media reports as saying because ArcelorMittal SA had failed to convert its mineral rights, it lost its real rights in the Sishen minerals, and therefore its entitlement to iron ore at cost plus 3% had fallen away.

Converting the mineral rights would have required ArcelorMittal SA to sell a portion of its South African business to black investors. But the company has not implemented a black economic empowerment transaction. Its attempt about two years ago was sunk by the ­effects of the recession.

An ArcelorMittal SA insider says an interim process to supply the company’s steel plants is underway. He says the steelmaker and Kumba are working on a plan to speed up the resolution of the dispute.

Old order mineral rights that are not converted revert to the state.

Nimrod Zalk, the official leading the government’s intervention, said he was unable to comment. But the market made the biggest comment . ArcelorMittal SA shares resumed trading on Wednesday after being suspended since last Friday.

Friday’s R92.11 a share represents a 20% drop on the pre-suspension price. This translates into a R11 billion loss for ArcelorMittal SA.

Nku Nyembezi Heita, chief executive of ArcelorMittal SA, and his Kumba counterpart Chris Griffith are headed for very interesting times. Kumba’s decision to cancel its supply contract from the Sishen mine (above) means that the two, their teams and the government will spend time renegotiating the contract. All of them have vested interests. Kumba accounts for most of ArcelorMittal’s iron ore. Kumba does not have enough capacity to sell to international buyers. The government is keen to see lower steel prices to encourage the manufacturing sector in the country.

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