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Mittal SA will the discounted prices for iron ore
Steel maker ArcelorMittal SA has set out the broad parameters for a long-term solution to its dispute with Kumba. While it held out hope for a quick conclusion to the dispute, it has ruled out making current interim prices the basis for a long-term solution and express ed the desire to
return to an arrangement with substantially discounted iron-ore prices.
Until February it paid cost plus 3% for iron ore from the Sishen Iron Ore mine.
In an interview yesterday, ArcelorMittal SA CE Nonkululeko
Nyembezi-Heita said it was “possible” the negotiations with the
government and Kumba over restructuring the industry might provide
quicker results than a mediation process between the two companies,
which is likely to take more than two years.
Ms Nyembezi-Heita ruled out a mere extension of the current interim
arrangement, which followed the intervention in the dispute by the
Department of Trade and Industry two weeks ago.
These discussions resulted in an interim pricing mechanism in terms of
which Kumba will supply iron ore to ArcelorMittal in defined quantities —
at 50 a ton for ore supplied to its mill at Saldanha on the west coast,
and 70 a ton for deliveries to its two inland mills.
The agreement followed a tense stand-off between the two organisations
after Kumba had unilaterally rescinded a deal under which it supplied
iron ore to Mittal at “cost plus 3%”.
The agreement had been in force for almost a decade.
It now appears that Mittal would prefer something akin to this agreement
being reinstated as a condition for supplying cheap steel to South
African industry and maintaining a steel beneficiating and exporting
capacity.
Asked whether Mittal would be prepared to accept the interim pricing
agreement — which is already pegged at a little more than half the
current international price — Ms Nyembezi-Heita said “not even a little
bit”.
The interim agreement, she said, was pegged at “the bare minimum which
would allow SA’s mills to operate at break-even”, and nobody was in
business simply to break even, she said.
Mittal has claimed that it has provided cheaper steel to the local
market using a “basket” pricing method, which was an average of several
markets around the world.
Ms Nyembezi-Heita said the difference between using this system and the
import parity pricing between 2006 and last year resulted in R9bn
effectively being pumped into SA’s economy.
However, how this “basket” pricing system actually worked is fiercely contested.
Since the interim pricing agreement with Kumba was agreed upon, the
system has been scrapped in favour of a system that analysts say
effectively constitutes import parity pricing.
Ms Nyembezi-Heita said this was not quite true and that steel prices “may still be below the import parity level”.
This was independently confirmed, with one analyst estimating that hot
rolled coil, the base product in the steel industry, is now about
10%-14% above the previous basket prices and just 2% below import parity
prices.
“At this pricing level, imports become more attractive and more
merchants are expected to increase import purchases of steel,” the
analyst said.
However, this selling price is clearly not what the Department of Trade
and Industry is seeking, and it has requested an investigation into
abuse of dominance with the competition authorities as a result of this
premium to benchmark pricing.
The Competition Commission has already referred one case involving
Mittal to the Competition Tribunal, with the recommendation that a fine
of 10% of 2008 revenue be imposed, which could amount to about R4bn.
Trade and Industry Minister Rob Davies said earlier this month that he
was “extremely concerned” about the “high price” of steel in SA.
Mr Davies told Bloomberg yesterday that he also thought Kumba had an
obligation to supply the iron ore to Mittal at a “competitive
developmental price”.
Kumba has said it hoped to charge market prices but would conditionally be prepared to consider a long-term solution.
Previously the company has said it wants mining rights granted to
Imperial Crown Trading to be rescinded and granted to it as a condition
for a broader solution.
Imperial won a prospecting right in a part of the Sishen Iron Ore mine
when Mittal failed to convert its right to the stake to a new-order
mining right.
The negotiated solution is widely considered to be the best scenario,
since the web of related issues could take years for the legal process
to sort out.
If parties do not reach agreement, analysts agree the risks of job losses and plant closures are extremely high.
Mr Davies has already met both Mittal and Kumba jointly and separately,
and the discussions are due to resume when he returns from a trip to
Russia.
Source: Business Day
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