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Govt seeks discount ore deal for steel firms

Source: Mining mix Date: 25 November 2010

GOVERNMENT said on Thursday it will seek a deal with domestic steel and iron industries allowing steel firms to source iron ore from Kumba Iron Ore at a discount, subject to a steel pricing agreement.

The government has proposed the measure in a move to keep steel prices in South Africa competitive and to avoid larger companies using their dominance to charge excessive prices.

ArcelorMittal South Africa, a unit of the world’s largest steel maker, has for months been at loggerheads with Kumba, a unit of Anglo American, over prices for the steel-making ingredient.

Kumba in February terminated a long-term deal under which it sold ore to the steelmaker at a discount, after ArcelorMittal failed to convert its rights over a 21.4% stake in Kumba’s Sishen mine into a new right as required by law.

Pending a resolution of the dispute, now in arbitration, the two companies have reached an interim agreement valid until the end of July next year for Arcelormittal to source iron ore from Kumba at about half of the market price.

Cabinet said in a statement on Thursday it would seek a deal that would allow ArcelorMittal and other steel producers to source iron ore from Kumba’s Sishen mine at a cost plus 3% price, subject to a steel pricing model.

“(The proposed deal is) conditional upon a developmental pricing model - determined by government - that will result in domestic prices of steel being no higher than the lowest quartile of global prices,” read the statement.

Government has in the past accused ArcelorMittal of charging excessive prices to the detriment of the local steel industry and for failing to pass the benefits of the iron ore discount it used to receive from Kumba to consumers.

An ArcelorMittal spokesperson said he could not comment as the company had not yet seen the full report presented to cabinet. Iron ore and pellets made up 17% of ArcelorMittal’s costs in the six months to the end of June.

Kumba could not immediately comment.

MIXED FORTUNES

Analysts said that while the agreement may benefit the local steel consumers, it may signal the government dismissing the claim by ArcelorMittal and Imperial Crown Trading (ICT) to the stake in Kumba’s mine.

ICT was granted a prospecting right over the stake for which ArcelorMittal previously held a mining right. As a result, the steelmaker said in August it would buy ICT to regain the right.

“Sounds like a good outcome for the consumers of steel. And by extension the construction companies and the mining companies,” said Sasha Naryshkine, an analyst at Vestact.

“Does not sound like a great outcome for ArcelorMittal… it sounds like that ‘chip’ has reverted to government,” he said, referring to the mineral right over the Sishen mine stake.

Shares in ArcelorMittal were trading 0.09% lower at 7,639c by 15:55, while Kumba was up 0.61% at R415.60, compared with a 0.71% rise in the JSE’s Top-40 index

GOVERNMENT said on Thursday it will seek a deal with domestic steel and iron industries allowing steel firms to source iron ore from Kumba Iron Ore at a discount, subject to a steel pricing agreement.

The government has proposed the measure in a move to keep steel prices in South Africa competitive and to avoid larger companies using their dominance to charge excessive prices.

ArcelorMittal South Africa, a unit of the world’s largest steel maker, has for months been at loggerheads with Kumba, a unit of Anglo American, over prices for the steel-making ingredient.

Kumba in February terminated a long-term deal under which it sold ore to the steelmaker at a discount, after ArcelorMittal failed to convert its rights over a 21.4% stake in Kumba’s Sishen mine into a new right as required by law.

Pending a resolution of the dispute, now in arbitration, the two companies have reached an interim agreement valid until the end of July next year for Arcelormittal to source iron ore from Kumba at about half of the market price.

Cabinet said in a statement on Thursday it would seek a deal that would allow ArcelorMittal and other steel producers to source iron ore from Kumba’s Sishen mine at a cost plus 3% price, subject to a steel pricing model.

“(The proposed deal is) conditional upon a developmental pricing model - determined by government - that will result in domestic prices of steel being no higher than the lowest quartile of global prices,” read the statement.

Government has in the past accused ArcelorMittal of charging excessive prices to the detriment of the local steel industry and for failing to pass the benefits of the iron ore discount it used to receive from Kumba to consumers.

An ArcelorMittal spokesperson said he could not comment as the company had not yet seen the full report presented to cabinet. Iron ore and pellets made up 17% of ArcelorMittal’s costs in the six months to the end of June.

Kumba could not immediately comment.

MIXED FORTUNES

Analysts said that while the agreement may benefit the local steel consumers, it may signal the government dismissing the claim by ArcelorMittal and Imperial Crown Trading (ICT) to the stake in Kumba’s mine.

ICT was granted a prospecting right over the stake for which ArcelorMittal previously held a mining right. As a result, the steelmaker said in August it would buy ICT to regain the right.

“Sounds like a good outcome for the consumers of steel. And by extension the construction companies and the mining companies,” said Sasha Naryshkine, an analyst at Vestact.

“Does not sound like a great outcome for ArcelorMittal… it sounds like that ‘chip’ has reverted to government,” he said, referring to the mineral right over the Sishen mine stake.

Shares in ArcelorMittal were trading 0.09% lower at 7,639c by 15:55, while Kumba was up 0.61% at R415.60, compared with a 0.71% rise in the JSE’s Top-40 index

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