***SPOTLIGHT: Amsa brinkmanship pays off in KIO deal

Kumba Iron Ore (KIO) last week conceded ground when it acquiesced to an interim iron ore pricing agreement with ArcelorMittal South Africa (Amsa).

The agreement, which came after an emergency meeting between the two companies’ ceos and top level government ministers, will see KIO cut the proposed cost of iron ore to Amsa’s inland plants.

Once the deal had been sealed, the steelmaker said it will continue to operate its Saldanha steel mill after it threatened to close it the week before.
For now, it seems, Amsa’s brinkmanship has paid off.

But this is only the latest chapter in the long and complicated story of the relationship between the two companies. It is a tale that begins with the sale of state-owned miner and steelmaker Iscor to Mittal Steel, a process which began in 2001.

The unbundling of Iscor’s steelmaking and mining assets eventually saw KIO, a subsidiary of Anglo American, take control of the Sishen mine in the Northern Cape.

But it wasn’t a simple deal. As part of the agreement Amsa was granted a 21.4% stake in mineral rights to Sishen, giving it 6.25 million tpy of iron ore from Kumba at cost plus 3%.

For some reason, which still isn’t clear, Amsa failed to convert its old order rights to new order rights earlier this year, as required by the Mineral and Petroleum Resources and Development Act.

The South African government then awarded these rights to black economic empowerment companyImperial Crown Trading (ICT), a decision that has caused controversy.

Since then, Amsa has tussled with KIO in an attempt to avoid paying higher prices for its ore.

Two weeks ago, Kumba said it would no longer deliver ore to Amsa, unless the steelmaker paid in advance for the material. Kumba also set out two options for Amsa to pay increased prices for iron ore.

Either the company could pay the difference in escrow until the dispute was resolved, or Amsa could have paid $50 per tonne for iron ore delivered to Saldanha and $80 per tonne for material delivered to its other plants.

Amsa says these prices were set to rise by 10% every six months until September 1 next year, when Amsa would be expected to pay the prevailing market price.

Amsa then raised the stakes, announcing that operating its flat steelmaking plant at Saldanha was no longer viable unless it was able to buy iron ore from KIO at cost plus 3%. It intended to initiate plans to close the plant, it said.

It was a dramatic statement. Saldanha has capacity to produce 1.2 million tpy of crude steel, a significant portion of the 8 million tonnes of steel Amsa produced last year as a whole.

Kumba had little means to retaliate. The company said it would export material it didn’t sell to domestic customers should Amsa not take the ore. But resources minister Susan Shabangu has said iron ore previously consumed domestically should not be exported in its raw form.

The government wants to see minerals in South Africa used downstream in industrial processes internally.

That doesn’t mean Amsa’s threat wasn’t a controversial move. There are plenty of analysts who question Amsa’s claims about the cost efficiency of the plant.

Parts of the South African government, as well as consumers have complained about Amsa’s pricing. And, more recently, market players have expressed concern over a surcharge that the company began to levy on its steel prices since May.

Amsa said the R525 per tonne charge was to cover increased costs for iron ore if KIO was successful in forcing the company to pay market prices. That didn’t go down well in the local market.

“[Amsa] has consistently stated that it does not determine the price of its steel products on the basis of its input prices,” said KIO. “In addition, [Amsa] has continued to set its domestic prices in line with global steel prices.”

Amsa’s operations should still be significantly profitable on the basis of the proposed new iron ore prices, KIO has claimed.

Nevertheless, as a result of the emergency meeting last Monday, it looks like Amsa has done pretty well with the compromise agreement. The company will pay KIO a flat $50 per tonne for iron ore delivered to the Saldanha mill, which is on the coast and very close to the railway between the Sishen mine and the port of Saldanha.

For deliveries to its inland plants at Vanderbijlpark near Johannesburg and Newcastle in KwaZulu-Natal, Amsa will pay Kumba $70 per tonne. The interim period began in March and will expire in July next year.

Amsa’s threat to close Saldanha obviously had its desired effect.

The involvement of not just Shabangu, but also South Africa’s trade and industry minister Rob Davies and economic development minister Ebrahim Patel in the emergency meeting shows how seriously it was taken.

It’s easy to see why. If Amsa decided to mothball Saldanha and refused to sell it on, the steelmaker would leave the South African market seriously undersupplied.

Sure, Amsa would be cast as a corporate villain and its share price might fall. But there would be very little anyone could do – the company is listed after all.
Of this, the government is painfully aware. A shortfall in steel supply would seriously undermine the South African economy. And angry unions, responsible for 4,000 newly redundant workers, would be a burden the administration could do without.

In total, Amsa supplies 70-80% of the country’s steel demand. It is a very serious player. Not everyone in South Africa is happy about that.

The Industrial Development Corporation (IDC), the government’s economic development agency, has been thought to be supportive of the establishment of another steelmaker in South Africa for years.

This would bring increased competition to a market which has been subject to numerous anti-competitive pricing investigations. One saw the country’s Competition Tribunal find Amsa guilty of pricing flat products excessively.

Last year the IDC moved a step further, saying it was progressing feasibility studies into projects that might see five new steel mills built in South Africa.
This may have been interpreted as a knee-jerk reaction by government following news of the Competition Tribunal’s decision against Amsa. But the proposals have moved on since then and the IDC looks serious.

Two are for smaller plants with 300,000 to 500,000 tpy capacity, making products for applications in construction. Another is for a larger flat products plant.
“After some investigation we found there was scope for two mini-mills,” said John Bester, senior project manager for mining and beneficiation at the IDC, last year. “We conduct ongoing feasibility studies.”

But even these two smaller projects are a long way away.

“Even if the projects were bankable, by the time you had an environmental impact assessment, raised the funding and constructed the plants it would be five years,” he said. “The market will look completely different in five years.”

And the viability of a new integrated flat products-focussed steelmaker is dependent on the use of technology that will allow it to be fed with magnetite ore. Otherwise it will be forced to compete directly with Amsa for raw materials.

Nonetheless, reports that Tata Steel was considering a plant in the region have kept talk of this kind of facility alive.

And there is local magnetite supply – Rio Tinto’s Palabora copper mine in Limpopo has stacks of magnetite and has been selling a great deal to China. It makes sense for a local steel plant to make use of this source.

In the meantime, the battle for control of the remaining rights in Sishen rumbles on. KIO has started legal proceedings.

According to South Africa’s Business Daily, Kumba has disputed the award of the mineral rights to ICT, saying the empowerment firm’s application breached the Mineral Resources and Petroleum Development Act and included information lifted from Kumba’s own application.

The government will have to tread carefully. It has a duty of care to stem concerns that mining legislation in South Africa is not conducive to investment.

Earlier this year, Canada’s Fraser Institute said that South Africa had fallen down its list of attractive mining jurisdictions around the world, dropping from 49th position to 71st.

The pricing agreement between Amsa and Kumba won’t ease these concerns.