News Room - Steel Industry

Posted on 26 May 2009

Rio takes 33pc iron ore price cut in benchmark deal

Global miner Rio Tinto Ltd has agreed a 33 per cent cut in contract fine iron ore prices with Japan’s Nippon Steel Corp, setting a benchmark for steelmaking costs after prolonged negotiations.

 

Assuming rival BHP Billiton concludes a similar deal with Japanese and South Korean mills, as is the usual practice, the pressure will shift to Chinese steelmakers like Baosteel that have fiercely resisted anything less than a 40 to 50 per cent reduction in prices to 2007 levels.

 

The long overdue settlement for contracts beginning from April will bring some certainty to both miners and mills, which have been in deadlocked talks as demand for both steel and its main raw material collapses in the wake of a global recession.

 

Rio said in a statement it will sell Pilbara and Yandicoogina fine ores for 97 US cents (RM3.43) per dry metric tonne unit versus 144.66 cents last year for the current shipping year. Lump will sell for 112 cents a tonne, down from 201.69 cents.

 

BHP Billiton declined to comment on its price talks.

 

Fortescue Metals Group, which sells all its iron ore to China, has not been involved in any price negotiations, as it just follows the benchmarks set by the bigger miners.

 

“This is a good start. What’s going to be somewhat more telling is to confirm that the Chinese will follow suit. That’s probably more critical,” Fortescue’s executive director, Graeme Rowley, told Reuters.

 

The cuts had been anticipated since last week after Japanese mills softened their stance.

 

 

CHINESE RESISTANCE

 

The deal also ends years of steadily rising iron ore prices, including the 96 per cent increase that Rio Tinto and BHP won last year for its Pilbara mines, as China’s double-digit economic growth fuelled the rapid expansion of its steel industry.

 

This year, however, the Chinese mills have been adamant that they will accept nothing less than a full reversal of last year’s increase, nearly halving prices to ease the financial pain of tumbling steel prices.

 

But their bargaining position may have been undercut by the dramatic decline in domestic iron ore production, which, by some estimates, has halved because of the sharp fall in spot market prices, forcing China to import record volumes of ore from abroad to help feed steel demand propped up by fiscal stimulus.

 

Rio Tinto’s iron ore chief executive, Sam Walsh, told a mining conference in Canberra today that demand for ore from China had been strong in recent weeks, helped by the closure of high cost iron ore mines in China.

 

“That has opened up an opportunity for us and I’m very pleased to say that for the last six weeks our operations have been running absolutely flat out,” Walsh told reporters on the sidelines of the conference.

 

Analysts have said the cuts may be sufficient to keep high cost Chinese mines from re-opening.

 

Brazilian miner Vale has let the Australian miners take the lead in this year’s negotiations after having missed out on the peak of last year’s pricing, settling an early deal with customers at a 71 per cent rise.

 

Vale last week said it had not started negotiations to settle prices with steelmakers, saying this year it preferred to wait for BHP and Rio Tinto to settle first.