ArcelorMittal's Low-Price Ore Deal Returns to Haunt South African Economy

Anglo American Plc’s threat to halt cheap iron ore sales to ArcelorMittal in South Africa may close a $1-billion steel mill, throw thousands out of work and undermine the country’s growing car industry.

The dispute pits Lakshmi Mittal, a man Forbes Magazine says is worth $28.7 billion, against the government, which brokered the below-price deal nine years ago to bolster steel production and preserve jobs. Anglo’s Kumba Iron Ore Ltd. unit is seeking to get a price closer to $142 per metric ton, the market level, than to the $30 it says ArcelorMittal pays. An interim price and arbitration agreed to last week end in 2011.

ArcelorMittal says a significant increase may force the shuttering of the plant in Saldanha, curb exports and limit supplies locally. Absent a resolution, such industries as car manufacturing may have to turn increasingly to steel imports, raising vulnerability to volatile exchange rates.

“In one corner sits one of the world’s richest men, and for him to close Saldanha would be nothing,” said Hennie de Clercq, executive director of the Pretoria-based Southern African Institute of Steel Construction. “Where the elephants play the grass usually gets trampled.”

Giles Read, a spokesman for ArcelorMittal in London, referred requests for a response from Mittal, company chairman and chief executive officer, to Vanderbijlpark-based ArcelorMittal South Africa Ltd. A spokesman there who declined to be identified said in an email: "Should there be a decision to close Saldanha, it would be made by the Board of Directors of ArcelorMittal South Africa."

No Jobs Growth

“If there’s a shutdown, it’s probably going to have a significant impact on overall manufacturing,” said Arthur Kamp, an economist at Sanlam Investment Management in Cape Town. “It’s not helpful to get job losses in an environment where there is no real jobs growth.”

South African industries ranging from construction to mining are dependent upon steel, much of it bought locally. The country’s 25.2 percent unemployment rate is the highest of 62 nations monitored by Bloomberg.

Among the most affected industries may be the country’s car and car-part makers, the biggest manufacturing exporters. South African car exports rose 12-fold, to 174,947 units last year, from 15,764 in 1995. Companies such as Toyota Motor Corp. and General Motors Co. make vehicles for local sales as well as for shipment to Europe and elsewhere in Africa.

“The dispute is a source of concern to all users and all buyers of South African produced steel and products,” Nico Vermeulen, director of the National Association of Automobile Manufacturers, said from Pretoria.

The rand was the most volatile of 16 major currencies over the last year, according to data compiled by Bloomberg.

Government Deal

The foundations for the clash between the world’s biggest steel company and Anglo, which in the 1960s controlled companies that accounted for more than half of the market value of the Johannesburg Stock Exchange, were laid in a 2001 deal brokered by the government.

ArcelorMittal South Africa’s predecessor company, founded by the state in 1928, was allowed to split its barely viable steel assets away from profitable mines as long as the mining company supplied iron ore at just above the cost of extraction.

Mittal first agreed to invest in the company, through his own LNM Holdings NV company, in 2001. Later that investment was transferred to ArcelorMittal, which has now built its stake in the South African unit to 47 percent.

“The government was the midwife of this dispute,” Peter Major, a fund manager at Cadiz Holdings Ltd., which oversees the equivalent of $7 billion in investments, said from Cape Town. “Only government can resolve it.”

Overseas Markets

Kumba, taken over by Anglo in 2003, used a loophole to cancel the contract starting March 1. About 80 percent of its iron ore is sold overseas and the company says it has alternative markets for the rest as well.

At its peak ArcelorMittal South Africa’s forerunner, Iscor Ltd., employed 70,000 people, seven times more than it does today. The Saldanha mill is the largest business on South Africa’s barren west coast, and has the capacity to produce steel sheet as thin as 1.6 millimeters (0.06 of an inch).

If it closes, thousands of families “will be without bread on their table,” said Frank Mbanze, deputy mayor of the town of Saldanha.

Kumba says it can abrogate the contract because ArcelorMittal’s South African unit failed to renew mining rights for its 21.4 percent stake in its biggest mine, Sishen. ArcelorMittal says Kumba, as the controlling shareholder, should have renewed the rights on its behalf.

Arbitration Period

The companies agreed on July 22 to undergo arbitration and to maintain interim prices for a year, while ArcelorMittal holds off on its threat to close Saldanha. Trade Minister Rob Davies said the same day that he plans to be involved in the mediation and expects the steelmaker to cut prices.

ArcelorMittal South Africa spokesman Themba Hlengani declined to comment on the dispute, citing the arbitration, while Kumba said it behaved “responsibly and reasonably.”

The steelmaker was expanded to shield South Africa from sanctions during apartheid and to provide jobs, mainly to working-class Afrikaners whose votes kept the whites-only government in power.

Today the ArcelorMittal unit has a market value of about $5 billion, compared with the $150 million analysts valued it at in 2001.

ArcelorMittal hasn’t cut prices significantly below the cost of imports, prompting several antitrust investigations. One of them resulted in a record 692 million rand fine that was successfully appealed. Those disputes may now count against it.

ArcelorMittal “never gave South Africa any break,” Major said. The government will “say we gave you guys a hell of a break and you just snubbed us.”

To contact the reporters on this story: Carli Lourens in Johannesburg at clourens@bloomberg.net; Mike Cohen in Cape Town at mcohen21@bloomberg.net;

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