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 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. 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.

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.

CEO Nonkululeko Nyembezi-Heita said that, in view of the interim agreement, the company 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 proccess, not on AMSA's conviction that the supply agreement remained legally valid and binding.

Outgoing FD Kobus Verster said that all the proceeds from the surcharge would be paid over to SIOC. Some R100-mln 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-mln 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-mln recorded in the preceding six months.

Total steel sales were 2,7-mln 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%.

Source: Engineering News