Iron ore sector can thrive if there is major support’

19 February 2011 | 03:41 Code : 20487 Geoscience events
The iron-ore industry can double output and create about 14000 new jobs in the next 10...

The iron-ore industry can double output and create about 14000 new jobs in the next 10 years, but it will need supporting infrastructure and market-based iron-ore prices. This is the view contained in an annexe to iron ore miner Kumba’s financial results this week. The iron-ore industry has been under pressure from the government to provide cost-based prices to steel producers, following Kumba’s cancellation of a cost-plus-3% iron-ore supply agreement with ArcelorMittal last year. The government believes that cheap iron ore can be used to enforce lower steel prices, which will enable job creation in the downstream steel market. However, analysis by ArcelorMittal and Kumba in their financial results presentations this week indicate that government intervention can be a fruitless and even damaging exercise. SA’s steel costs can be reduced by a maximum of 10-15% through subsidised input costs, but this might not be enough to make SA competitive compared with other steelmakers, who are "a lot lower on the cost curve and a lot closer to their export markets", said Kumba CEO Chris Griffith. Policymakers regularly say the country needs another steelmaker to increase competition and lower prices, and Kumba had undertaken its own research to "understand where the opportunities lie", Griffith said. More than 50% of SA’s steel production is exported; domestic demand is insufficient to take up all local capacity. However, SA has been unable to export all excess capacity as its costs are, on average, 30%-35% higher than its global competitors, according to the Kumba research. Even if iron ore, which made up 17% of ArcelorMittal’s cost base in the past financial year, was provided free, it would still not lower costs enough to make the industry internationally competitive. Other costs, particularly coking coal and other fuels, which accounted for 28% of ArcelorMittal’s costs, will also need to be addressed. SA does not have big deposits of high-quality coking coal. Nonkululeko Nyembezi-Heita, the CEO of ArcelorMittal, said: "We believe a focus on price is too narrow in scope and displaced; we need to look at the steel market in a broader light." For ArcelorMittal, which exported 32% of production last year, the exchange rate is another major factor affecting long-term sustainability. Its analysis shows the construction industry remains the major buyer of steel, accounting for 65% of local consumption in 2010. Yet Cape Town Iron & Steel Works (Cisco), a manufacturer of re-enforcing steel (rebar) for the construction industry, announced its closure last year. Without a recovery in demand from the construction sector, the steel market is not going to recover, Nyembezi-Heita said. Advanced downstream industries, for example the manufacture of metal products, accounted for only about 10% of local steel consumption, ArcelorMittal said. According to Kumba, the ingredients "for robust growth" are present in the South African iron-ore-mining industry, where reserves in Limpopo and Northern Cape can be successfully developed, but not in the steel industry. For the steel industry, possibilities under investigation include the development of new technologies to use SA’s lower-grade coal and iron-ore deposits and the building of an export slab mill. However, a mill with an annual capacity of five million tonnes can cost up to $7-billion and it would require long-term off-take and supply agreements and huge subsidies to be viable. "Government interventions focus on industries that have a structural competitive advantage. Government intervention in the South African iron-ore and steel value chain could have unintended negative consequences," Kumba said. The iron-ore miner, which posted record results this year, and ArcelorMittal are expecting a ruling on their arbitration proceedings regarding the cost plus 3% supply contract by early next year. Kumba cancelled the contract following ArcelorMittal’s failure to convert its 21.4% right in the Sishen mine. ArcelorMittal, which believes the supply agreement is not linked to the mining right, is expecting a roll-over of the interim supply agreement, which will lapse at the end of July.

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