News Room - Steel Industry

Posted on 29 May 2009

Posco Accepts Rio's Iron Ore Price Cut as Benchmark

Posco, Asia's third-largest steel mill, agreed to a 33 percent cut in iron ore prices with Rio Tinto Group, the world's second-biggest supplier, adding to pressure on Chinese mills to accept it as a benchmark.

 

The agreement matched the prices that London-based Rio agreed on May 26 with Japanese steelmakers, Choi Youn Joung, a spokeswoman for the Pohang, South Korea-based company, said today by phone.

 

Posco joins its larger rivals Nippon Steel Corp. and JFE Holdings Inc. in accepting the second-highest annual contract price on record. Mills in China, the world's biggest steel producing nation, haven't reached agreement and have previously called for a cut of as much as 50 percent as steel demand shrinks with the global recession.

 

"When you have the biggest Korean steelmaker and the biggest Japanese steelmaker agree it is going to make it hard" to resist, James Wilson, a resources analyst at DJ Carmichael & Co., said by phone from Perth. Recent improvements in steel prices in the U.S. and higher iron ore imports in China in the past five months make it harder to argue for a bigger cut, Wilson said.

 

Posco rose 2.3 percent to 404,000 won in Seoul trading as of 1:14 p.m. local time, compared with a 1.1 percent gain in the benchmark Kospi index.

 

Posco agreed to pay 97 cents a dry metric ton unit for iron ore fines, down 33 percent from a year ago. The price of iron ore lump dropped 44 percent to 112 cents. Lump ore is easier for some steel mills to process than fines. The three major producers, including BHP Billiton Ltd. and Vale SA, account for 85 percent of Posco's iron ore imports.

 

Talks with BHP and Vale are continuing, Posco's Choi said.

 

Lower Costs

 

The price cut, the first in seven years, will reduce costs for Posco, which cut production for the first time in its 41- year history in December, according to Kim Gyung Jung, an analyst at Samsung Securities Co.

 

"Overall cost of raw materials, including coal, may fall about 50 percent from a year ago, bigger than steel products price cut," Kim said. "This will definitely push up Posco's earnings."

 

Posco said on May 14 annual sales may be pared by 2.7 trillion won ($2.1 billion) following steel price cuts of as much as 20 percent amid weakening demand. The mill, which gets about 70 percent of its sales in Korea, cut prices for hot- rolled coil to 680,000 won a ton from 850,000 won.

 

In the first-quarter, Posco posted its largest profit drop in eight years after the global recession reduced demand from automakers, builders and electronics companies.

 

Chinese mills should push for a bigger cut because there is an oversupply of ore, Shen Wenrong, the chairman of Jiangsu Shagang Group Co., China's fifth-largest producer, said yesterday in an interview.