Nonkululeko Nyembezi-Heita
Photo by: Duane Daws
Steel producer ArcelorMittal South Africa (AMSA) is not considering changes to its pricing policy in light of the iron-ore settlement agreement reached with Kumba and the group’s CEO has also questioned whether the cost-plus-20% deal could truly be considered a ‘developmental price’ as being advocated for by government.
However, CEO Nonkululeko Nyembezi-Heita again stressed that the new all-in pricing arrangement for 6.25-million tons of iron-ore a year, which was unveiled earlier in the week, would be beneficial to the group. This was particularly the case when compared with the interim pricing agreement that was struck after Kumba terminated, in 2010, a cost-plus-3% arrangement that had prevailed following the separation of Iscor into separate mining and steel entities in 2001.
Under the interim deal, which was finalised with the assistance of Department of Trade and Industry (DTI), Kumba had been selling a maximum of 4.8-million tons of iron-ore at a weighted average price of $65/t.
Speaking following the release of stronger third-quarter results, which saw earnings recover to R199-million, from a R168-million loss position during the same period in 2012, Nyembezi-Heita stressed that the settlement had been the outcome of bilateral commercial negotiations and had not been directed by government.
The DTI and the Department of Mineral Resources (DMR) had been informed of developments towards the latter stages of the negotiations, but had not endorsed the settlement.
It, therefore, remained uncertain as to whether government would perceive the cost-plus-20% arrangement as meeting its developmental-pricing aspirations, which could be formalised as part of proposed amendments to the Mineral and Petroleum Resources Development Act. Government believes such pricing to be necessary to stimulate higher levels of beneficiation and to ensure that value was added to locally mined resources ahead of export.
“I am not sure that the DMR believes Kumba has ticked the box,” Nyembezi-Heita said. But from a steel perspective, “nothing really changes” as the idea of a developmental pass-through was predicated on a cost-plus-3% price.
“So there is still some engagement to be made,” she added, while indicating that AMSA planned to continue its discussions with the DTI on the matter.
In the meanwhile, the group was responding to government’s appeals for pricing that improved the ability of local steel users to compete for infrastructure projects on a “selective basis”.
“What we have not done and what is not currently in our plans is a wholesale reduction of steel prices. That has not been part of the discussion, at least internally.”
Nevertheless, the benefits of the settlement were reaffirmed, with CFO Matthias Wellhausen indicating that it was supportive of the group’s objective to improve its earnings before interest, tax, depreciation and amortisation (Ebitda) to $100/t by 2015 through cost reductions and business improvements.
The Ebitda cost of iron-ore was $74/t in 2012, whereas the group was now anticipating costs of closer to $64/t in 2014 as a result of the settlement.