Anglo American subsidiary Kumba Iron Ore has announced that it will amend its pricing mechanism of the existing long-term supply agreement with ArcelorMittal South Africa.

The amendments will see it move from a cost-based price to a price based on an export parity price (EPP)

According to Kumba, the EPP will be calculated on the basis of an international index and ArcelorMittal will receive a discounted price at certain index price levels.

ArcelorMittal will receive a 5% discount to the EPP if the index price ranges between $60/t and $70/t.

"The current market environment presents significant challenges for the mining and steel industries."

If the price is between $70/t and $80/t, the company will receive a 6.25% discount, and at an index price more than $80/t, a discount of 7.5% would apply.

ArcelorMittal will pay the EPP if the index price is less than $60.

Kumba said that the terms remain subject to a final definitive agreement being signed between both the companies.

Kumba Iron Ore CEO Norman Mbazima said: "The current market environment presents significant challenges for the mining and steel industries.

"This pricing amendment is commercially acceptable and sustainable for both parties. It will iron out the current distortions, whereby domestic prices can exceed those for export, thereby best serving the interests of the industry and country as a whole."

In November 2013, the companies signed a new iron ore supply agreement, which will regulate the sale and purchase of iron ore between Sishen Iron Ore Company (SIOC) and ArcelorMittal South Africa.

The agreement, which came into force from 1 January 2014, regulated the sale of up to 6.25 million tonnes a year of iron ore by SIOC to ArcelorMittal South Africa.

There was also an agreed price for a pre-determined quantity of iron ore for the initial two years of the agreement.