Rio Tinto's Korea iron ore win pushes China

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May 29, 2009

Rio Tinto's Korea iron ore win pushes China

RIO Tinto has landed another punch in its high-stakes fight with China, after South Korean steelmaker Posco agreed to a cut in iron ore prices of between 33 per cent and 44 per cent, two days after Japan's leading steelmaker signed a similar deal.

Posco had originally asked suppliers to cut iron ore prices by 50 per cent and the Chinese steel mills are demanding a 40-50 per cent cut.

Fortescue Metals Group chief Andrew Forrest yesterday warned China it would not secure a different iron ore benchmark price to that secured by Nippon Steel and Posco.

Mr Forrest said yesterday that the major producers would not agree to a different benchmark with China, and the economic powerhouse would be forced to use the spot market if it did not want to settle its contracts on the price set by Japan.

"As a major importer of iron ore, which Japan has been -- it founded the Pilbara and will always be a major importer of iron ore -- if they have now set a price and it doesn't get followed, then that is fine," Mr Forrest said.

"But those that choose not to follow it have to have the alternative, which is the spot price."

Rio Tinto finalised a new agreement for its Hamersley products with Nippon Steel on Tuesday, which will see the price for fines decline -- for the first time in seven years -- by around 33 per cent to $US62 a tonne and the price for lump fall 44 per cent to around $US71 a tonne. The spot price is tracking around $US67.50.

South Korea's Posco, the world's fourth-largest steelmaker by output, said yesterday it had agreed with Rio on a 33 per cent cut in iron ore fines at $US58.2 a tonne and a 44 per cent cut in iron ore lumps at $68.88 a tonne.

"Talks with two other major iron ore suppliers -- BHP Billiton and Vale -- are still going on," company spokeswoman Choi Youn-joung said.

Analysts said Posco was expected to conclude the remaining deals with BHP Billiton and Vale at the same levels as Rio, or at similar levels.

China has continually signalled it will push for a greater discount. It is seeking a cut of about 45 per cent, and says it will not settle for the 30-35 per cent drop just because Japan has.

National Australia Bank, in a report on the contract negotiations, said it was unlikely that contracts with Chinese steelmakers would be abandoned.

"In the coming few months, we expect an announcement of a contract price with the Chinese, and although miners may settle for slightly larger discounts compared with the Japanese and Korean steel mill contracts, Australian companies will be very reluctant to relinquish the freight premium secured in 2008," the bank's report said.

NAB also forecast that due to Chinese steel production currently outpacing underlying demand, iron ore prices were likely to remain subdued for the rest of 2009, before gradually picking up over 2010 to achieve a more robust price recovery during the 2011 calendar year.

Mr Forrest said he didn't know any steel mills that would prefer to use spot prices.

"The whole of the industry would prefer a benchmark," he said. "The spot price is dangerously volatile."

He added that there would be the standard push back from China during price negotiations, but said: "They can't have it both ways. Either you have a benchmark system or a highly volatile spot price. The Chinese want the benchmark system. They want the predictability -- but then again, once it's set, will they honour it?

"It will be interesting. Whichever way China goes, it will have a formative impact on the future of the global seaborne iron ore trade. If they don't accept the Nippon-Rio new benchmark, they will consign themselves to the spot market for all time, and that certainly in the past has shown extreme upside volatility."

Mr Forrest was still confident about China's strength through the global downturn and said he did not think the recent demand for iron ore was just re-stocking.

"The steel industry is in the bathroom in everywhere but Asia.

"The traditional markets of our competitors are in the loo, so they have come straight into China with gusto," he said.

Sarah-Jane Tasker | May 29, 2009 - Article from: The Australian

source: http://www.theaustralian.news.com.au/

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