Anglo American, a diversified mining group, yesterday cancelled an iron-ore supply agreement reached in 2001 on a cost plus 3 per cent basis between its subsidiary Sishen Iron Ore Company (SIOC) and the world's largest steel maker ArcelorMittal.

Luxembourg-based ArcelorMittal's South African subsidiary, ArcelorMittal South Africa, said yesterday that it had received a notice from SIOC, a subsidiary of  Anglo American-owned Kumba Iron Ore Limited, that it will stop supplying iron ore to ArcelorMittal South Africa at a cost plus 3 per cent basis from 1 March 2010, but would, instead, be willing to supply at market prices.

Kumba, which is the world's fourth-largest iron-ore producer and the largest in Africa, is owned 63.4 per cent by Anglo American, 13.1 per cent by the Industrial Development Corporation of South Africa Ltd  and 23.5 per cent by minority shareholders.

Kumba, which owns Thabazimbi and Sishen iron ore mines, holds 74 per cent in SIOC, while the rest of SIOC is owned by Exxaro, a large South African coal and heavy minerals mining company, SIOC Employee Share Participation Scheme and the SIOC Community Development Trust.

Kumba Resources, the world's fourth-largest iron-ore producer and now 63.4-per cent subsidiary of Anglo American, was unbundled from its parent Iscor Limited in 2001. Mittal acquired Iscor and was guaranteed the 21.4-per cent stake that Iscor held in the Sishen mine, which entitled it to receive 6.25-million tons of iron-ore annually at cost plus 3 per cent as its share of the mine's production.

When Mittal acquired Iscor, Mittal was guaranteed the 21.4 per cent stake that Iscor held in the Sishen mine, which entitled it to receive 6.25-million tons of iron-ore annually at cost plus 3 per cent as its share of the mine's production.

The 6.25-million tons of ArcelorMittal's share of iron ore was supplied by SIOC to the steelmaker .

But Anglo American, which holds a majority stake in Kumba, the parent of SOIC, was not happy that the steelmaker was getting its iron ore supply at $26.50 per tonne, while the global contract price in 2009 was around $66 per tonne and spot market price as high as $140 a tonne.

Last year Kumba had a turnover of around R24 billion ($3.1 billion) and if ArcelorMittal's share of the iron ore was sold to the steelmaker at contract prices, it would have added another R5 billion ($645 million) to Kumba's turnover.

Anglo American very shrewdly exploited a new South African mining legislation, where mining companies had to convert their mining rights by 30 April 2009, from private holding, to the new legislation where the state is now the custodian of all mineral rights in the country and issues exploration and exploitation licences.

But ArcelorMittal South Africa failed to convert its old mining rights at the Sishen mine as required by the Mineral and Petroleum Resources Development Act, prompted SIOC to claim it was no longer obliged to supply iron-ore to the steelmaker at cost plus 3 per cent.

Kumba said in a statement yesterday, "SIOC has offered to sell an equivalent amount of iron-ore to Mittal from the Sishen mine on commercial terms."

ArcelorMittal has rejected SIOC's stand and said that it would initiate urgent proceedings against SIOC to enforce the agreement.

"Due to the price sensitive nature of this information, ArcelorMittal South Africa has requested the Johannesburg Securities Exchange to halt trading of its shares until a further announcement is made on Wednesday 3 March 2010,"it said in a statement.

South Africa's trade and industry minister Dr Rob Davies said that he would speak to Kumba, Anglo American-Kumba's majority shareholder and ArcelorMittal South Africa to find out the reasons as well as the implications of Kumba's announcement, which led to ArcelorMittal calling for the suspension of trading in its shares yesterday.

ArcelorMittal South Africa, which has already hinted of going to court, because the prime movers of the bundling in 2001, the Industrial Development Corporation (IDC) and the then trade and industry minister, Alec Erwin had engineered the break-up in such a way that the country's being the country's biggest steelmaker it would not be dependant on outside sources for raw materials for making steel.

Both IDC and Erwin had wanted steel production to be vertically integrated with raw materials required to make steel, such as iron-ore and coking coal, and hence guaranteed that the new steel entity had access to 6.25-million tons of iron ore at cost-plus 3 per cent.