Rio Said to Offer 20% Price Cut to Asian Steel Mills

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Wednesday, 08 April 2009

Rio Tinto Group, the world’s second- largest iron ore producer, offered a temporary 20 percent price cut to Asian steelmakers after annual contract negotiations stalled, said four executives with knowledge of the deal. Major customers were offered the interim discounts, two of the executives said, declining to be identified because the agreements are confidential. Some Chinese mills rejected the discount as too small, the two other executives said, without saying how many companies were approached.
Rio’s offer falls short of the 40 to 50 percent cut that Chinese steelmakers, the world’s largest buyers of iron ore, are demanding because of falling steel prices. Annual contract talks may take another four months to settle, Citigroup Inc. said April 3. Mills typically pay prices at last year’s levels until new rates are settled.
“Most Chinese steelmakers won’t agree to that because buying at a 20 percent discount would make the production costs higher than product prices,” said Cherry Chen, a Beijing-based analyst at Core Pacific-Yamaichi International Ltd. “At least a 30 percent cut may be needed. I wouldn’t rule out the possibility that some mills would agree to Rio’s offer to maintain long-term cooperation.”
Rio fell 81 pence, or 3.7 percent, to 2,127 pence by 9:57 a.m. on the London Stock Exchange, cutting the company’s market value to 33 billion pounds ($48 billion). In Australia, Rio shares closed 10 percent lower, the biggest drop since Dec. 4.
Locked in Talks
The company offered a 20 percent price cut for iron ore fines, the benchmark product, and 25 percent for iron ore lump, two executives said. Iron ore fines, a powder, is used mainly in steel production, while lump is solid ore.
China’s steelmakers posted a combined loss of 770 million yuan ($112 million) for January and February as prices for their products collapsed, the government said last month.
Steelmakers and iron ore producers are locked in talks to settle annual prices for the year that began April 1. Cia. Vale do Rio Doce, Rio and BHP Billiton Ltd. account for about three quarters of globally traded iron ore, shipped from Brazil and Australia.
Amanda Buckley, a Melbourne-based spokeswoman for Rio Tinto, declined to comment today. Shan Shanghua, general secretary of the China Iron & Steel Association, couldn’t be reached at his office phone for comment. Chen Ying, vice president of Baoshan Iron & Steel Co., China’s largest steelmaker, didn’t return calls seeking comment.
2007 Levels
Mills have asked for cuts in benchmark annual prices to $50 a metric ton, about the level reached in 2007, one of the executives said. Australian iron ore fines were settled at about $92 a ton last year. Ore makers say they can get higher prices selling the material on the spot market, an executive said.
Spot prices are trading at $63 a ton, below the February high of $84 a ton, as demand from steelmakers has dropped, Citigroup analyst Johan U Rode wrote in an April 3 report.
China is pressing producers to cut 2009 contract prices to below 2007 levels, or at least a 44 percent reduction for Australian ores, the China Iron & Steel Association said March 19. That would be the first reduction in seven years. Prices almost doubled in 2008.
Source: Bloomberg