Government appears intent on using the debacle over the award of lapsed mining rights in the Sishen iron ore mine to force ArcelorMittal South Africa (Amsa) to agree to a major cut in local steel prices.
Amsa lost its rights to a 21,4% share in the ore body at the end of April 2009 when it failed to convert its old-order rights.
Tied to Amsa's share in Sishen was a cost plus 3% agreement with Sishen mine owner Kumba, which provided Amsa with ore at way below market prices. Kumba has cancelled the supply agreement, although an interim deal was reached pending arbitration on the matter.
This year Amsa tried to rescue its position by entering into an empowerment agreement with Imperial Crown Trading (ICT), the politically connected shelf company that, controversially, had been awarded prospecting rights for the 21,4%.
Kumba, which also applied for the 21,4%, has mounted a high court challenge to the ICT prospecting rights award, which would result in President Jacob Zuma's son, Duduzane, becoming a multimillionaire should the ICT-Amsa deal go through.
The Gupta family is also part of the so-called Ayigobi empowerment consortium, which includes ICT shareholders.
But a Cabinet statement released on Thursday suggests that government will use the stalemate to try to force through a "developmental" steel price that was originally part of the terms of the sale of the old Iscor steel assets to Mittal in 2001.
The statement said a ministerial task team would negotiate with the "relevant stakeholders" in the iron ore and steel industry. The objective was to provide "cost plus 3% access to the 21,4% Sishen mining rights to Amsa or other steel producers, conditional upon a developmental pricing model -- determined by government -- that would result in domestic prices of steel being no higher than the lowest quartile of global prices", the statement read.
This would mean a drop in local steel prices of about 10% to 15%.
Steel is one of the major input costs for industrial growth and it is understood that analysts have warned the presidency that industrial development will be strangled if Amsa is allowed to persist with a policy largely based on import parity pricing.
The Cabinet statement said the task team would make use of various policy instruments to bring parties to the table, including:
It is not clear what impact the new government initiative will have on the Amsa deal with ICT and the Ayigobi consortium. The ICT purchase is still undergoing a due diligence review and Amsa spokesperson Themba Hlengani said no money had yet been paid to ICT.
Government's announcement appears to have taken Amsa and Kumba by surprise.
Hlengani said on Thursday afternoon Amsa was still studying the government announcement. Kumba spokesperson Anne Dunn said "the engagements have only just started" and it was too early to react.
Trade and Industry Minister Rob Davies telegraphed government's intentions in September, when he told reporters the unbundling of Iscor in 2001 had included provisions intended to require the beneficiary -- Amsa -- to pass on the ore cost savings in the form of a competitive steel price for local steel users. Davies said then government was committed to "reinstate those developmental obligations" and was "going to identify the levers that we have" to achieve it.
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