[miningmx.com] – THE way has been cleared for Sishen Iron Ore Company (SIOC) and ArcelorMittal SA (Amsa) to begin arbitration, or even resume negotiations, over the supply of iron ore to the steelmaker.
This follows the Supreme Court of Appeal’s decision today to reject the claims of the mineral resources department (DMR) and Imperial Crown Trading (ICT) to mine Sishen – an entitlement now granted exclusively to SIOC, a subsidiary of Anglo American’s Kumba Iron Ore.
The Supreme Court’s decision upholds the 2011 judgement of the North Gauteng High Court in the matter, and ends a complex three-year commercial, legal and ultimately political wrangle that fuelled investor scepticism regarding the security of tenure in South Africa’s mining industry.
According to a statement by Kumba Iron Ore, the Supreme Court of Appeal’s judgement also captures the concept that Amsa failed to convert its undivided share of the old order mining right, equal to a 21.4% stake in the mine.
“This means that SIOC has the exclusive right to mine iron ore at the Sishen Mine,” Kumba said in a statement to the JSE.
The market response was neutral. Shares in Amsa were only 1.65% down while Kumba Iron Ore was marginally up. This suggests the economic consequences of the decision are still to be played out as Amsa and Kumba set about finding a resolution to the separate commercial dispute over iron ore pricing.
Negotiations over the supply of iron ore to Amsa from Kumba’s SIOC eventually dissolved with both parties deciding to opt for arbitration – a process held up by the appeals lodged by ICT and the DMR.
Kumba said no date for the arbitration had yet been agreed and that the sale of iron ore to Amsa in the interim would stick to an interim pricing agreement.
This refers to a temporary settlement renewed in December 2012 in which 4.8 million tonnes of iron ore would be sold by Kumba to Amsa at a weighted average price of $65/t. The current market price for iron ore is $137/t, although Liberum forecasts an average iron ore price CIF of $120 for 2014 and 2015 – still nearly double the price Amsa is currently paying.
Yet there are decent conditions for both parties to consider returning to face-to-face negotiations.
From Kumba’s perspective, a prolonged arbitration process might take place against the backdrop of a falling iron ore market, an environment that might progressively weaken its negotiating position.
Forecasting the future iron ore market is equally as fraught however, as reflected in a March 17 report by Liberum Capital in which it found that incremental supply would outstrip demand in 2014 and 2015, but that “… a looming wall of supply in iron may not be as large as the market speculates. “[T]he incentive for major producers to under-deliver on expected production is high,” Liberum Capital said.
Amsa, however, may feel the Supreme Court of Appeal has in its decision underpinned the exclusivity of Kumba’s right to mine SIOC and strengthens the iron ore miners’ insistence that the original cost plus 3% sales agreement is invalid.
