The tussle between ArcelorMittal SA and Kumba Iron Ore took a surprising turn yesterday with an announcement that the minister of trade and industry, Rob Davies, has been approached to facilitate mediation in the dispute.
A statement released by the ministry yesterday said Davies was approached by one of the parties in the dispute concerning the interim iron ore pricing and supply agreement.
“Minister Davies agreed to facilitate a mediation process and he has appointed a mediator. The mediation process – which aims to facilitate terms and conditions on which SIOC will supply iron ore to AMSA after 31 December 2012 and until the finalisation of the arbitration process regarding the status of the 2001 Sishen Supply Agreement – has commenced”.
The statement added that Davies has made it clear that the main objective of this mediation process is to find an interim agreement which ensures continuation of iron ore supply and steel production in the economy. “Any short-term agreement will not be at the expense of long-term arrangements, presently the subject of work by various government departments”.
This statement from the ministry may suggest that Davies is launching an intervention designed to force both Kumba and ArcelorMittal into an arrangement that suits developmental pricing in the steel manufacturing industry. It has been observed that the dispute between ArcelorMittal and Kumba was threatening the sustainability of this industry by imposing high steel prices in the economy. To be fair though, the department of trade and industry (DTI) had been complaining even before this dispute came into being about “uncompetitive” ArcelorMittal pricing. The DTI has for some time been plotting an intervention that can address the situation. If Davies can broker a deal which will give ArcelorMittal access to cheap iron ore prices, he will most likely be in a stronger position to secure cheaper steel prices for the South African market. ArcelorMittal accounts for an overwhelming majority of local steel supplies.
ArcelorMittal and Kumba have since 2010 been trapped in this dispute over the status of an iron ore supply agreement originating from the unbundling of the former Iscor iron ore asset now held by Kumba.
At the time of the unbundling, in 2001, ArcelorMittal SA which inherited the steel manufacturing operations of the former Iscor was given a right to acquire 6Mt of iron ore from the Sishen mine at cost plus 3%. The matter was referred to arbitration and provisional supply agreements have been in place since 2010. ArcelorMittal has indicated in its financial results that these provisional agreements have put enormous pressure in its operating costs.
The 3% plus costs agreement was linked to ArcelorMittal’s 21.4% share of the Sishen mineral rights. When ArcelorMittal neglected to renew its share of the rights; Kumba which had the other 78.6% of the rights and had converted its share, moved to cancel the contract in 2010.
Kumba had argued that ArcelorMittal had lost its right over Sishen and therefore the supply agreement was also no longer applicable.
ArcelorMittal challenged this logic in court in a case which involved Kumba challenging another party, ICT, which was now claiming the 21.4% share of Sishen mineral rights. ICT had applied for these rights and was awarded by the department of mineral resources. In this case Kumba argued that it was the only competent party that should gain these rights. On the other hand ArcelorMittal kind off concurred with Kumba by arguing that according to the new regulations a mnining right can never be subdivided. As such, argued ArcelorMittall Kumba automatically earned 100% control of the Sishen rights when it converted its 78.6% share. However this has no bearing on the supply agreement.
To a large extent Judge Raymond Zondo concurred with ArcelorMittal when he ruled on the ICT vs Kumba case. ICT is appealing Zondos’s ruling.