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Tuesday, June 09, 2009

Chinese steelmakers eye iron ore price cuts of 33%

Michelle Wiese Bockmann - Monday 8 June 2009


CHINESE steelmakers have been tipped to accept iron ore price cuts averaging around 33%, similar to those agreed last month by South Korean and Japanese mills.
The China Iron & Steel Association (CISA) refused to comment on reports today that the country’s largest steelmaker, Baosteel, would accept Rio Tinto’s 2009 contract price.
The world’s second-largest iron ore producer last month cut prices by a third, to $97 per tonne, down from $145 per tonne in 2008 for Japanese and South Korean steelmakers.
However, China has repeatedly reiterated that its mills were holding out for a 40% cut in prices, according to CISA, the de facto negotiator in this year’s talks.
CISA last week rejected media reports that a state-owned steel major was in talks with BHP Billiton over an indexed pricing system.
The price at which ore is purchased is a critical driver of seaborne iron ore demand and global freight rates.
China imported just under half of the 890m tonnes of seaborne iron ore in 2008 and has built volumes to a record 188m tonnes from January to April, 20% higher than the same period last year. The three producers Rio Tinto, Vale and BHP Billiton, control about 70% of the seaborne market.
Iron ore price discounting and lower freight rates made China’s lower-quality domestic ore uncompetitive, propelling imports and raising capesize freight rates last week to more than $100,000 a day.
The annual contract negotiations are being finalised amid rising acrimony over Rio Tinto’s plans for a $5.8m merger of its Western Australian iron ore operations with rival miner BHP Billiton.
Opinion is split on whether China will fall into line with other Asia steelmakers.
An analyst at Australian bank ANZ, Mark Pervan, told Australian media that it would be hard for Chinese mills to hold out for a bigger price cut.
It would not be surprising if they agreed with the benchmark set by Japanese and Korean mills late last month, he said.
But a former participant in the iron ore negotiation process, Liu Yongshun, said Rio Tinto would not have as much leverage as it thought to push for a higher price with steel makers.
Mr Liu, chief executive of Hong Kong-listed precious metals trading company APAC Resources, said Rio Tinto had sacrificed its competitiveness in China when it ended a partnership with state-owned Chinalco, its largest shareholder. Rio Tinto last week walked away from a $20bn refinancing deal with Chinalco, in favour of a rights issue and the iron ore merger with BHP.
Rio Tinto China managing director Anthony Loo said last month that more than half the country’s domestic mines had closed, unable to compete with lower-cost, higher-quality ore.
“It remains to be seen whether recent freight hikes translate into higher spot prices, or spot prices stay the same. If the spot price does increase, it might mean some domestic producers re-enter the market,” he said.  - Additional reporting Hui Ching-hoo