A lower steel price won't significantly help manufacturers in South Africa to increase output because steel accounts for only a small part of their costs, Kumba Iron Ore Ltd. (KIO.JO) said Monday.

Kumba has met, and will be engaging further, with the government to discuss the role steel and iron ore pricing and output expansion has on South Africa's economic growth.

South Africa's Department of Trade and Industry has said high steel prices have hindered the country's manufacturing growth and low iron ore prices are important to keeping steel prices down.

"Lowering the steel price by 10% or more isn't going to have a gigantic impact on output," said Robert Stillman of Charles River Associates, who summarized the papers on behalf of Kumba Monday. "Evidence from international studies shows that if you lower the steel price by 10% it's unrealistic to expect an increase in manufacturing output by much more than 2%."

In March 2010 a long-running deal to supply ore from Kumba's Sishen mine to ArcelorMittal South Africa Ltd. (ACL.JO) at 3% above the cost of production lapsed after the steel company failed to renew mining rights on a stake in the mine by a government-imposed deadline.

Kumba, a unit of Anglo American PLC (AAL.LN), said it expects to resolve the pricing dispute with ArcelorMittal SA in early 2012.

"The only real big user of Sishen iron ore is ArcelorMittal SA...it would be the only steel producer to benefit materially from 'cost-plus' pricing of Sishen iron ore," Stillman said. "Lowering the iron ore price might have an impact on how much steel ArcelorMittal SA produces, but it wouldn't affect manufacturing output."

Stillman said the best way to bring steel prices down is to increase competition on the steel producing side.

ArcelorMittal said Monday the cost-plus 3% iron ore pricing was part of a "government-sanctioned strategy to enable South Africa to become a competitive steel exporter."

It was also one of the main factors influencing the ArcelorMittal Group's decision to acquire Iscor's steel making unit, ArcelorMittal said, adding it's studying the Kumba documents on pricing and manufacturing.

"This obligation dates from 2001 when as part of the unbundling of Iscor, ArcelorMittal South Africa paid Kumba R2.8 billion for the right to receive 6.25 million tons per annum of iron from the Sishen Mine for a minimum of 25 years at cost plus 3%," ArcelorMittal said.

Stillman said the South Africa steel industry is at a disadvantage on the export market outside of Africa because of its location.

-By Devon Maylie, Dow Jones Newswires; +44 (20) 7842 9483; devon.maylie@dowjones.com
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