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Johannesburg - ArcelorMittal South Africa (Mittal SA) has been stopped from sourcing iron ore from Kumba's Sishen South expansion project at the same reduced rate it pays for the rest of its material from the iron ore producer.
After earlier negotiations about the issue between the two parties yielded no agreement, the case was referred to an arbitration panel consisting of three independent members.
However, in a Stock Exchange News Service announcement on Tuesday, Kumba said: "Kumba shareholders are advised that the arbitration panel has issued an award in favour of the Sishen Iron Ore Company [a Kumba subsidiary] and has determined that Mittal SA is not entitled to participate in the Sishen South project."
Speaking to Fin24.com after the announcement, Mittal SA's company spokesperson Sven Lünsche couldn't say where the company would now source the 4 million tonnes of iron ore it had required from Kumba's Sishen South project in the Northern Cape.
Said Lünsche: "It's still a bit too early to comment, but we might take the decision on appeal."
The steel giant and Kumba already have a deal in place which sees the former purchasing 6.25 million tonnes a year of iron ore from Sishen at cost plus 3%, a price it had hoped to fetch in this latest failed agreement.
The amount of iron ore requested by Mittal SA (4 million tonnes) would amount to about half the total output of Sishen's planned 9 million tonnes of annual output.
But even on trying to secure more iron ore from the mining group, Mittal SA in past months has been purchasing less and less iron ore from Kumba. In the six months to end-June 2009, Kumba said its domestic sales had dropped 26% due to lower demand from Mittal SA.
Kurt Benn, a portfolio manager at Cadiz African Harvest, said Mittal SA needs to secure additional iron ore supplies as it tries to substitute the 2 million tonnes of ore it sources from the Thabazimbi mine (also owned by Kumba), whose lifetime is coming to an end.
"Mittal SA is basing their case on the long term, typically a 20-year horizon," Benn said.
But if Kumba continues with a cost plus 3% model it "would not favour them now" for an array of reasons, for instance the increased cost of electricity, added Benn.
On Wednesday afternoon Mittal SA was trading down 2.34% at R107.43 per share and Kumba was down 0.91% at R238.50/share.
Broker consensus given by data supply firm McGregor BFA has Mittal SA on a "sell".
- Fin24.com
