BHP May Secure Lower-Than-Expected Iron-Ore Price Cut

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Friday, 16 January 2009

BHP Billiton Ltd., the world’s biggest mining company, and Rio Tinto Group, may secure a lower than expected decline in annual contract iron ore prices as demand rebounds in China amid the start of annual price talks. “The market certainly has strengthened since late last year,” Tom Price, commodities analyst at Merrill Lynch & Co. in Sydney, said by phone. “Things are improving, the Chinese steel mills will be keen to settle early and the iron ore producers will probably want to delay.”
Baosteel Group Corp., China’s biggest steelmaker, started talks to set annual contract prices with Rio Tinto in Shanghai this week. Prices, which have risen the past six years to a record, may fall 30 percent, according to a Bloomberg News survey of 11 analysts this week, trimming profits for London-based Rio and Melbourne-based BHP, the world’s No. 2 and 3 iron-ore exporters.
“It may not even be that much because the latest import data into China was extremely strong,” said John Veldhuizen, an analyst at BBY Ltd. in Sydney who has forecast a 30 percent drop in prices. “The market may actually be tighter than we think.”
China’s imports of iron ore rose 6.2 percent in December from November and steel exports gained 7.4 percent, the first gain in four months, the Beijing based customs office said Jan. 13. Stockpiles of iron ore at Chinese ports also fell and some steel mills in the country have reopened following a slump in demand in the fourth quarter last year, Merrill Lynch’s Price said.
Seven Years
Still, Chinese steelmakers, the largest consumer of iron ore, are likely to win their first cut in contract prices in seven years as a global recession curbs demand for raw materials. Brazil’s Cia. Vale do Rio Doce, the world’s biggest iron-ore exporter, Rio, and BHP, who account for three quarters of traded iron ore, need to stave off the cuts to support profits as metal prices slump.
“I’m expecting contract iron ore prices to be down at least 40 percent, and potentially down as much as 60 percent,” Sean Fenton, who manages about $324 million at Tribeca Investment Partners said today in Sydney.
Contract prices for coal and iron ore from Australia, the world’s biggest shipper of the raw materials, may drop significantly this year as slowing industrial growth curbs demand, the nation’s central bank said today.
Ore Survey
Contract prices for benchmark Australian ore may fall to 101.26 cents per dry metric ton unit, or about $64 a metric ton, from a record 144.66 cents, according to the median estimate of 11 analysts surveyed by Bloomberg News. That’s double the 15 percent cut estimated in a survey of 11 analysts on Nov. 6.
Rio Tinto dropped 8.2 percent to A$37.30 at the 4:10 p.m. Sydney time close on the Australian stock exchange. BHP fell 6.6 percent to A$28.90. Iron-ore prices are set annually for the year starting April 1 following the completion of talks between producers and steel mills.
Executives from Baosteel and Rio exchanged views on the economy and industry outlook at the initial Jan. 12 meeting, two company executives who asked not to be identified because the talks are confidential said Jan. 13.
China may be asking for a price cut of between 40 percent and 45 percent, Macquarie Group Ltd. analysts led by London-based analyst Jim Lennon said in a Jan. 12 report. UBS AG analysts have forecast a decline of 40 percent. A 30 percent cut would still be the second-highest price on record.
‘Over the Top’
“I don’t think the iron ore price will fall as much as everyone thinks,” said David Flanagan, chief executive officer of Atlas Iron Ltd., an Australian supplier of iron ore to China. “We are seeing strengthening demand and that is being reflected in the stock market and things are looking OK. I think 30 percent is over the top.”
China unveiled a 4 trillion yuan ($585 billion) stimulus package in November to invest in housing, railways, roads and airports to bolster sagging growth in the world’s fourth-largest economy, raising expectations steel and metal consumption will increase.
Cash prices for iron ore delivered into China posted a “significant recovery” last month, rising 30 percent to about $75 a ton, Macquarie said. The discount of the spot price to the contract price has narrowed from as much as 40 percent to 20 percent, the report said.
Source: Bloomberg