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May 04, 2010

Kumba considers terminating supply to ArcelorMittal SA, as iron-ore dispute heats up

Engineering News Editor Terence Creamer speaks on 702's The Midday Report, anchored by Chris Gibbons
Engineering|Africa|Export|Petroleum|Resources|Transnet|Africa|Steel|Iron Ore|Iron-ore|Power
Engineering|Africa|Export|Petroleum|Resources|Transnet|Africa|Steel|Iron Ore|Iron-ore|Power
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South African iron-ore miner Kumba Iron Ore (KIO) on Tuesday effectively moved its ongoing dispute with ArcelorMittal South Africa (AMSA) from the realm of a pure dispute over pricing, into one that could now also affect supply, indicating to Engineering News Online that it could as "a last resort" terminate supply to Africa's largest steel producer.

In a note to shareholders, the JSE-listed miner said that, unless there was urgent resolution on an interim pricing and payment mechanism, the basis upon which it would continue to supply iron-ore to the steel producer could be affected.

KIO did not immediately indicate a timeframe for reaching such an agreement, but a spokesperson told Engineering News Online that the time period should not exceed eight weeks.

The miner also did not immediately elaborate on what options it was considering for the 6,25-million tons that its supplies yearly to AMSA from its 74%-held Sishen Iron Ore Company (SIOC). However, KIO stressed that it did indeed have "other options to sell the ore".

"We have an agreement with Transnet to deliver an extra four-million tons a year in 2010 and 2011 charging a 'super tariff'. We cannot discount the possibility that, if we cannot reach agreement, a last resort would be to terminate supply," the spokesperson told Engineering News Online.

However, she also stressed that KIO did not believe it was in anyone's interests to stop supply "and we are attempting to do all in our power to avoid such an outcome".

"We have made extensive efforts to come to an agreement with AMSA and have been unable to do so," the spokesperson said.

In its statement to the stock exchange, KIO strongly denied that it had told AMSA that it would continue to invoice on the basis of cost-plus 3% until the dispute had been resolved, as had been stated by the steel producer in its own April 29, 2010, notice to that market.

AMSA also indicated in the same statement that it had raised a contingent liability reflecting the "price derived from an export-parity principle and the contractual cost-plus 3% price, in the event SIOC prevails in the arbitration".

"That statement is incorrect," KIO said.

Instead, the miner argued that its announcement of April 19, 2010, reflected the "true position": "Namely that SIOC required AMSA to accept its interim proposal that AMSA pay the contractual price (cost-plus 3%) to SIOC and the difference between that price and the interim price proposed by SIOC into escrow, or provide a suitable guarantee for its payment in the event of SIOC being successful in the arbitration".

KIO told Engineering News Online that the "contingent liability" would not suffice as a guarantee.

However, AMSA spokesperson Julian Gwillim said that the JSE-listed steel producer stood by its statement of April 29, 2010, and would not enter into negotiations with KIO on the merits of the dispute through the media.

The two companies have been in dispute over the future pricing of iron-ore flowing from the Sishen mine since February 5, when SIOC notified AMSA that it was cancelling a favourable supply deal, struck in 2001, on the basis that AMSA had failed to convert its 21,4% undivided share of the Northern Cape mine in line with the demands of the Mineral and Petroleum Resources Development Act.

SIOC began invoicing AMSA on commercial terms as from March, and AMSA CFO Kobus Verster revealed last week that the difference between the the old agreement and the new invoice was $100/t, with 350 000 t having been supplied during the month.

AMSA has also started charging South African steel consumers a controversial R600/t-plus surcharge as from May 1, 2010, in a bid to partially offset the impact of the rise in iron-ore costs. The proceeds would be recorded as a liability in the group's financial accounts and would be returned to consumers should AMSA prevail in its arbitration dispute with KIO.

The Department of Trade and Industry has lodged a complaint of abuse of dominance over the surcharge with the Competition Commission, while consumers are up in arms over what appears to be an attempt by AMSA to recoup costs associated with its own corporate misjudgement.

AMSA has also confirmed with Engineering News Online that it will increase steel prices by between 2% and 17% as from June 1, 2010 - news that was greeted with anger by steel consumers.


Edited by: Creamer Media Reporter
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