Kumba: S.Africa can more double iron ore output

Mon Mar 28, 2011 1:04pm GMT

JOHANNESBURG (Reuters) - South Africa's iron ore industry has the potential to more than double output in the next 10 years under suitable growth conditions, Kumba Iron Ore said in a report issued on Monday.

The report by Kumba, the world's 10th-largest iron ore producer and a unit of Anglo American, cited conditions such as necessary transport logistics and a viable market for the off-take of iron ore and steel products.

The company also said the country would need a suitable regulatory environment that encourages market participants to make the necessary investments.

"These growth projects are capital intensive and will not be economically viable without market-related iron ore prices (at export parity price levels)," the company said.

Kumba's iron ore production rose 3 percent to 43.3 million tonnes in 2010.

Kumba has been at loggerheads with ArcelorMittal South Africa, a unit of the world's biggest steelmaker, over prices for the steel-making ingredient since February last year.

A long-term deal, under which Kumba sold ore to ArcelorMittal SA at a discount, lapsed after the steelmaker failed to convert its rights over a stake in Kumba's Sishen mine into a new right as required by law.

The government now wants at least 21.4 percent of iron ore output from Kumba's Sishen mine to be sold at cost plus 3 percent to help the domestic steel industry.

But Kumba said in the report that discounted iron ore prices were unlikely to lift the local steel sector.

"Iron ore typically contributes less than 1 percent to the costs of these end products and is largely insignificant in its impact on overall costs of downstream products," Kumba said.

It added: "Even if iron ore is discounted significantly, this has an immaterial impact on the cost of most downstream users."

Pending a resolution of the dispute, Kumba and ArcelorMittal SA reached an interim agreement valid until the end of July this year for ArcelorMittal to source iron ore from Kumba at about half of the market price.

ArcelorMittal SA has said it expects the arbitration to be heard early next year and that it will negotiate with Kumba to extend the interim pricing deal until the dispute is resolved.

The government granted Imperial Crown Trading a prospecting right over the stake in Kumba's mine for which ArcelorMittal previously held a mining right, a decision which Kumba is contesting.