R38bn at stake in supply dispute between ArcelorMittal, Kumba
July 30, 2009
By Justin Brown
About R38 billion in revenue could be at stake in the dispute between Kumba Iron Ore and ArcelorMittal South Africa over whether the steel maker can receive up to 4 million tons of ore a year from Kumba's new Sishen South mine at a little more than cost.
The dispute centres on whether ArcelorMittal SA can participate in the new mine on the same terms as a supply agreement allowing it to buy up to 8.85 million tons a year of iron ore from Kumba's Sishen and Thabazimbi mines at just more than cost.
Kobus Verster, the financial director of ArcelorMittal SA, said if it received a favourable arbitration ruling, then Kumba might have to supply the steel maker with 4 million tons of iron ore a year over the life of the mine at cash plus 3 percent.
The Sishen South supply would replace 2.6 million tons a year of ore from Thabazimbi, which ends output in 2014.
Verster said the steel maker was looking to extend the amount of iron ore it bought from Kumba on a cost plus basis by 16 percent to 10.25 million tons a year if it got a positive arbitration ruling.
Nonkululeko Nyembezi-Heita, ArcelorMittal SA's chief executive, said the matter, which went to arbitration last month, was likely to be completed by early next year.
ArcelorMittal SA spokesman Sven Lunsche said three industry experts had been appointed to arbitrate the dispute.
Over the 20-year life of the mine Kumba has R38bn in revenue at risk and ArcelorMittal SA has the same amount in costs at risk, using the iron ore unit cost achieved at the Sishen mine in the first half plus 3 percent for a cost to ArcelorMittal SA of R118 a ton and an estimated average iron ore sales price for the Kumba group during the first half of R599 a ton.
Sishen South is expected to produce first output during the first half of 2012 and achieve full capacity of 9 million tons a year in 2013. Last year, Kumba produced about 37 million tons of iron ore.
If ArcelorMittal SA won a positive ruling from the arbitrators then it would pay its share of the capital required to build the mine, Verster added.
A Kumba spokesperson was not available to comment.
Verster said the extra output would be used as part of the group's future plans to increase its steel production capacity from 8 million to 10 million tons a year.
Sishen South was approved last July at a cost of R8.5bn. The second phase of Sishen South would add a further 6 million tons a year.
Lunsche said the second phase of Sishen South was not on the table for discussion at the moment.
Nyembezi-Heita added that ArcelorMittal SA was on the lookout for local coal mining acquisitions to help feed its steel mills with fuel.
The group yesterday posted a first-half headline loss of R844 million, down from an interim profit of almost R4.6bn last year. As a result of the loss, the steel maker halted its interim dividend.
Nyembezi-Heita said steel demand was likely to improve during the second half thanks to 4.5 percentage points in interest rate cuts, the state's continued infrastructure spending and low steel inventories held by local industrial consumers.
ArcelorMittal SA was likely to raise output to meet demand.
The empowerment deal that the group was looking at for its local operations was on ice.
ArcelorMittal SA's shares fell 3.4 percent to R97.50.
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