High Stakes For World Steel Deals As Iscor Unbundles

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Researched by Industrialinfo.com (Industrial Information Resources, Inc.; Houston, Texas). The unbundling of Iscor, the South African Iron and Steel utility, immediately released the equity value of the old monolithic Iscor into the new Iscor and Kumba Resources listings on the Johannesburg Securities Exchange (JSE) at the end of November. The combined share value of the new separate companies is over four times the value of the monolithic Iscor a year ago, and is still climbing post unbundling. The successful separation of Iscor's twin entities was the culmination of a seven-year efficiency drive to put Iscor's steel production facilities amongst the lowest cost mills in the world. These operations are complemented by the rich iron ore deposits and the mining resources in the exploration division of Kumba, which is a significant world player in its fields of interest.

The anticipated rise in value has been a factor in the market for the past year, with local and international players making moves and taking positions to acquire key slices of both of the twin companies. These moves are taking place against the backdrop of a world steel market, which is looking for consolidation and constantly improved cost efficiencies in production.

The high profile players before, during, and immediately after the unbundling have been the Iscor and Kumba management, The Industrial Development Corporation of SA (IDC), the Anglo Indian LNM group, Avmin and Stimela. Other potential investors, including well backed black empowerment groups, Anglo American, BHP Billiton, Rio Tinto and other foreign interests including US based steel makers, have been circling the scene waiting to pick up choice pieces of the action. The healthy price rise and the strong sense of direction of both companies current management are focusing current developments into pathfinders for the world industry which is in the middle of serial huddles on oversupply, dumping, and techniques to improve the industry's supply chain and production techniques.

LNM owns Ispat, which is currently the fourth largest steel producer in the world, has targeted a top stake of 35% of Iscor and has already made $100 million available to acquire 9.4% of the shares from IDC as well underwriting a $160 million rights issue planned for next year. Stimela will have 11.5% after buying from Avmin for $80 million, which could end up with LNM, which is currently buying share blocks in the open market.

LNM is currently negotiating the takeover of Romanian and Algerian steel producers and through its subsidiary, Ispat, has plants in Mexico, the Caribbean, Kazakhstan, UK, Europe, and the USA. The company is pushing to become the second largest producer in the world. Generating 86% of its sales in Europe and the USA, it will offer Iscor global markets and research and development. Both groups already use direct-reduced iron smelting (DRI), which is a smelting without melting technique, Ispat means steel' in Hindi and is owned by London based Indian interests.

The 860km rail link between Kumba's iron ore mine at Sishen and the Saldanha steel plant, which has been incorporated with its $600 million debt into the Iscor portfolio, illustrates the ongoing movement by the dealmakers. Some may be looking to sell out production interests to buy back into ore exports. Sishen had a record production week of 670,815 tons of saleable product at the beginning of September and in August shipped a total of 1,137,020 tons to China, which was a one month record. Despite market concern over world over supply, Kumba management regards the Chinese market as a swing factor as it is importing increasing quantities of high grade ore to support its mounting production of high grade steel. This bolsters Kumba's export business in a tight market.

Iscor has locked into Kumba's iron ore supply with a 6.25 million tons a year procurement pact, which at rand currency rates could make this possibly the best high-grade ore supply deal in the world.

The Saldanha operation is also looking to merge with Duferco, the neighboring Swiss/South African venture which gives value added cold-rolled coil capacity to Saldanha's exports. The plant has been producing steel at $204 per ton and will be looking at $190/ton by mid 2002 and $180/ton by June 2003. Iscor as a group is looking to surpass the $170/ton being attained by world production leaders in the next year.

Consolidation in the South African industry, with international partners, is an ongoing drive and Iscor projects that the process could achieve possible savings of $100 million over the next decade and reduce costs and increase revenues by up to $30 million a year in that period.

With Bethlehem Steel and other icons of the US industry following each other into chapter 11 limbo and others posting losses, world over supply (estimated at a third of production potential), outdated production, employment scenarios and the sensitive topic of dumping all have motivated fresh and radical thinking.

In October Iscor was cleared by the Canadian International Trade Tribunal (CITT) of causing injury to the Canadian market with its cold rolled coil exports although the CITT did not cite Iscor's claims that harm had been caused by US dumping into Canada. In March, Iscor won a Canadian anti-dumping investigation on galvanized steel products and in October the Federal Trade Commission (FTC) absolved Iscor from charges by US steel manufacturers that it had dumped wire rod to the US market. Iscor has always been prudent not to push its exports to the US above an acceptable threshold. While more anti-dumping hearings are currently taking place in the USA with defensive tariffs as high as 40% being touted by the domestic industry, new shapes are beginning to emerge in the market which could see developed countries release their hold on grandfather industries' and see developing countries like South Africa play to the natural advantages of low cost energy, high quality ore and competitive labor rates and an industry free of government subsidies. On the ground deals between US and South African steel makers and feedstock providers could shift the basis for the anti-dumping/job protection' defensive paradigm. South Africa's industry has spare capacity all along the production process.

At present, guidelines puts the total share of the US market permissible to developing countries at 9% with a maximum of 3% per country but special exemptions could be made for strategic or scarcity reasons such as Saldanha's ultra thin gauge steel.

Wheeling-Pittsburgh Steel Corporation has made approaches to acquire and upgrade Iscor's Newcastle Natal slab production and shut down its own primary production in the Ohio Valley. The plan is that WPSC would source 500,000 tons of slabs per year from Iscor's Vanderbijlpark plant until their $30m investment in Newcastle had come on stream.

South Africa exported 500,000 tons of steel to the US last year, which represented15% of output. It could become a primary steel producer for US and international steel manufacturers.

Meanwhile Kumba is concentrating on its next phase on the iron ore, coal, heavy minerals and zinc markets with other exploitable resources such as diamonds on the back burner. Management is hoping that expansions at Sishen and Grootegeluk ore mines would be matched by developments at Hope Downs, the company's Australian iron ore mine. Kumba is looking to double its size in the next five to ten years and is not rushing to sell off the family silver as it actively seeks to enlarge black empowerment participation in its fortunes.