Kumba vs ArcelorMittal: how the giants fight for our resources

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Kumba vs ArcelorMittal: How the giants fight over SA’s natural resources (Article published in Cape Times, 8 March 2010)3 March 2010 was a momentous turning point for the sustainable development of South Africa’s natural resources, but no-one noticed.

This was the day that ArcelorMittal’s share price dropped 22%, slashing over R11 billion off the value of these shares! And this after quite a long run of bullish commodity prices and a scramble for ArcelorMittal shares. The least we could have expected was that this biggest-ever loss of listed share value by a single company on a single day in recent times should have made the main headlines, not just the financial news. Of course, the financial journalists reported on what they know best which is much less interesting than the real story behind the numbers and projections they love to spout.

What the financial journalists tell us is that iron ore mining giant Kumba informed ArcelorMittal that iron ore will no longer be sold at cost plus 3% to ArcelorMittal but rather at market rates. This immediately led to ArcelorMittal suspending trading of its shares because it new what the consequences would be – their worst fears came true on Wednesday 3 March 2010 after trading resumed. Kumba’s share price remained steady, thus suggesting that investors believe that Kumba is going to win what is going to be bloody and bruising battle ahead.

But what is the underlying story? Why does the largest steel producer in the world have the right to buy South Africa’s iron ore at cost plus 3% forever (well, actually, for 25 years, which is in business terms forever)? Why is this nearly four times lower than the market price? And why, then, does ArcelorMittal sell steel back to South African buyers at international prices that have got nothing to do with the actual costs of production? Prices, of course, that constrict growth in South Africa by raising the costs of production and construction. Why has our so-called ‘developmental state’ stood by and allowed ArcelorMittal to make such huge profits at the expense of South African growth and jobs?

Part of the answer lies in the late 1990s when ISCOR was being privatised as part of the state’s infatuation with neo-liberal economic theory at the time. The problem was that the mining side of the business was profitable, but the steel making side was not. So to sweaten the deal for a buyer, this offer of iron ore at cost plus 3% forever was thrown in. This had the full support of the state at the time.

Unsurprisingly, Mittal swooped in spotting a golden opportunity to get its hands on rich deposits just before the commodity boom set in. After nearly ten years of mega-profits ArcelorMittal found itself testifying before the Competition Tribunal as to why its prices for South African buyers of steel were so high. The audacious and stunning reply (which once again no-one noticed) was that Mittal’s South African operation is the most profitable in the global business and actually cross-subsidizes other parts of this global business. In short, ArcelorMittal was saying “thanks for your almost free iron ore, without it we would not be the global steel giant that we are making mega-profits selling into the booming Indian and Chinese economies. … And oh, sorry if this means sacrificing growth and jobs in your economy with our expensive steel – did you really believe that your own resources should benefit your own people?”

So when Kumba takes on this giant by cancelling this iniquitous deal, what is the question that Alec Hogg asks on SAFM at about 18h15 on the day ArcelorMittal lost R11 billion of share value? Is this fair play on Kumba’s part? So lets dwell on this question of fair play.

In a 2005 report entitled Where is the Wealth of Nations?, the World Bank estimated the “real wealth” (Growth National Income or GNI) of African countries by adjusting the national income and savings accounts as follows: deducting fixed capital depreciation, adding education expenditure, subtracting resource depletion and subtracting pollution damage. Because most African countries are exporters of primary resources, the result of this study was that most African countries had a net negative rate of national savings relative to Gross National Income. In fact, for every percentage point increase in dependence on extraction of natural resources for export, the country’s GNI declines by 9% against the real recorded GDP. The countries with the highest resource dependence and lowest capital accumulation included some of the largest resource exporters, namely Nigeria, Zambia, Mauritania, Gabon, Congo and, of course, South Africa. Indeed, South Africa’s real growth over the past decade has in fact been negative by this calculation.

Put simply, we are selling off our natural resources at prices that are lower than their real value (when, as the King III Report states, human and environmental factors are taken into account). The deal brokered by the state to sweaten the deal for Mittal when it bought ISCOR’s steelmaking business is just one example of the way South Africa manages its natural resources. There are many others, which is a big part of why we fail to diversify our economy and grow to create jobs.

So who has the moral high ground in the coming titanic battle of the giants? Is Kumba doing the right thing? Damn right it is, and all those who have lost truckloads of cash betting on ArcelorMittal shares should learn a crucial lesson: companies that profit through pillage by buying up African resources for prices that are below the real cost will ultimately fail, even global giants like ArcelorMittal. The challenge to Kumba, of course, is whether it will just replicate ArcelorMittal’s mercenary approach to prices, or whether it is prepared to be patriotic enough to ensure that South Africans benefit from the natural endowments that nature has bequeath them.