Africa's largest steelmaker ArcelorMittal South Africa (AMSA), which is embroiled in a bitter dispute with Kumba Iron Ore (KIO) over iron-ore supply and prices, reported on Wednesday that it would, from August 1, suspend a controversial iron-ore surcharge and begin charging a "single all-in price", reflecting the higher cost of iron-ore as agreed in an interim price agreement with KIO last week.

However, the company's new chief marketing officer Sunil Kumar indicated that, even under the new formula, domestic selling prices would decline by an average of 3% as from August 1, 2010, when compared with July prices, which were set against a base selling price, but also included the surcharge.

Kumar told Engineering News that prices would decrease by R187/t across all product ranges, which would mean that the decrease would be more than 3% for some and less for others.

In July, the JSE-listed steel producer decreased its base domestic steel prices by between R190/t and R715/t on flat steel, and by between R300/t and R715/t on long products. In the same month, the surcharge was decreased by R188/t, to R525/t.

The interim arrangement with KIO, which is effective from March 1, 2010, to July 31, 2011, replaced a now disputed cost-plus 3% arrangement that had been in place between the two companies since 2001.

Iron-ore would now be supplied to the Saldanha works at a fixed price of $50/t free-on-rail and a fixed price of $70/t, for both lump and fine material, supplied to AMSA's inland facilities. Under the previous arrangement, which KIO announced had been terminated as from March 1, 2010, owing to AMSA's failure to convert its Sishen mineral rights, it is estimated that AMSA was paying around $30/t for its iron-ore from KIO.

ARBITRATION AND INTERVENTION

The termination triggered an arbitration process, which was now getting under way, following initial delays. But the escalation in the dispute had also resulted in direct intervention by government, which is keen to secure an iron-ore deal that ensures a competitive steel industry that then also passes those benefits onto South African steel consumers - an arrangement that had never materialise, despite it being integral to the initial 2001 unbundling agreement, which ultimately saw Iscor split into AMSA, KIO and Exxaro.

An inter-Ministerial committee, led by Trade and Industry Minister Dr Rob Davies and including Mineral Resources Minister Susan Shabangu and Economic Development Minister Ebrahim Patel has been established in a bid to try and shepherd through a long-term pricing deal that is "developmental" in nature. This process is occurring in parallel to the arbitration process.

The Ministers have had two engagements with KIO and AMSA and a task team has been established to take forward some of the principles outlined in the meetings.

CEO Nonkululeko Nyembezi-Heita said that, should a long-term deal be fashioned, there was potential to have earlier resolution to the dispute, particularly given that the arbitration process is still anticipated to endure for between 18 months and two years.

She indicated that there appeared to be sufficient "goodwill" on all sides to ensure that the possible long-term arrangement is satisfactory to all involved.

But in light of the interim agreement, AMSA would, with effect from August 1, "charge a single all-in price, reflecting the higher cost of iron-ore, rather than a separate surcharge as had been charged previously. "ArcelorMittal South Africa's customers have been informed of this revision in its commercial policy."

She added that the extra amount that was now due and payable to the Sishen Iron Ore Company (SIOC) exceeded the funds that were raised through the surcharge over the last few months.

"Therefore, these accumulated surcharge funds and the shortfall will be paid over to SIOC," she said, but stressed that the interim agreement had "no bearing" on the arbitration process, not on AMSA's conviction that the supply agreement remained legally valid and binding.

She also hinted to the fact that its legal defence could seek to distinguish between the supply agreement and the ownership of the actual mineral rights, noting that nowhere in the supply agreement of 2001 was it stated that continued iron-ore supply hinged on AMSA's continued ownership of the Sishen rights.

Outgoing CFO Kobus Verster said that all the proceeds from the surcharge would be paid over to SIOC. Some R100-million had been raised since the introduction of the surcharge, which represented about 70% of what was now due to SIOC under the interim agreement.

EARNINGS RECOVER

Meanwhile, AMSA also reported a recovery in sales, prices and earnings for the six months to June 30, 2010, posting headline earnings of R1,8-billion for the period compared with a loss of R844-million during the corresponding period last year. But the company warned that earnings for the third quarter would decline, owing to lower international steel prices and demand together with input material costs that remain at high levels.

Earnings for the period were also materially better than the R404-million recorded in the preceding six months.

Total steel sales were 2,7-million tons, a 31% improvement on than the corresponding period during 2009 and 12% higher than the preceding six months.

Net realised prices were, on average, 8% higher than the preceding six months and remained at the same level as the corresponding period last year. In US dollar terms prices rose 22% compared to the first six months last year, owing to the strengthening of the average rand/dollar exchange rate from R7,54 to R9,22.

Nyembezi-Heita said that the turnaround "was achieved on the back of a marked improvement in market conditions post the financial crisis, both in terms of sales volumes and prices". However, she added that the strengthening of the rand since the first six months of 2009 had "limited the improvement in the results".

The cash cost of steel sales for the first half decreased by 15% compared to the corresponding period in 2009, which the company attributed to lower costs of coking coal and alloys, as well as higher volumes. Compared to the preceding six months, the cash cost of steel sales decreased by 7%.

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