12 March 2010
	Meddling makes a mess

The mess that's now facing ArcelorMittal, Kumba Iron Ore and their shareholders and customers demonstrates the dangers of government meddling in what it considers to be strategic industries. The steel sector in SA has a long history of government involvement, often with adverse and costly results. Iscor, the precursor to the two companies involved in the present wrangle, was created by government in 1928, as part of a drive towards industrialisation and self-sufficiency. When Iscor was partly privatised and listed on the JSE in 1989, it was hugely overstaffed, had low productivity, required large capital investment and had to be restructured and slimmed down. The share was often poorly rated by investors and in 2001 Iscor was split into two companies, one focused on steel production and the other on mining, partly to unlock value for shareholders (which included the state). When the split was agreed, government helped broker a contract that entitled the steel company, now ArcelorMittal, to source iron ore on unusually favourable terms from the miner, Kumba Iron Ore, which was not yet in existence. Both are now public companies, with international shareholders. Kumba Iron Ore, backed by parent Anglo American, is challenging the contract on legal issues relating to mineral rights. The steel producer is outraged, as it says it has a legal contract and paid for its ore supplies. It could find it gains little sympathy. Despite ArcelorMittal's highly favourable ore costs, there have been continual concerns about SA's domestic steel prices. The company has been highly profitable, though effectively subsidised by its ore supplier. A damaging - but unlikely - stalemate could continue. The best solution may be a new, compromise agreement struck privately or through arbitration. Government's record with intervening in this sector is not encouraging.