News Room - Steel Industry

Posted on 25 Jun 2009

Time for China to put up or shut up on iron ore price

With less than a week before the deadline to agree on a price for annual iron ore contracts, it is increasingly clear that China faces two unpalatable choices -- buying all its ore on the spot market, or swallowing the same deal agreed by rivals.

 

A slight but perceptible recovery in both steel and iron ore prices has undercut China's demands for a bigger price cut than the 33 percent that other Asian mills agreed.

 

To save face, the China Iron and Steel Association may come up with a deal at the same price as miners Rio Tinto, BHP Billiton and Vale agreed with Japanese and Korea mills, but build in wiggle room to benefit if prices fall by pegging contracts to spot prices.

 

For the moment, however, things appear to be playing into the miners' hands, with spot prices now almost as high as the recently settled long-term contract prices, and the prospect of a longed-for shift toward spot market pricing tantilisingly close.

 

"With spot iron ore and steel prices on the rise, the miners are unlikely to concede bigger contract price reductions with their Chinese customers than those already confirmed in Japan and Europe," Goldman Sachs JBWere analyst Malcolm Southwood said.

 

Spot prices to China have recovered to a four-month high of $77.50 a tonne including cost and freight, or around $60 free on board, roughly in line with the price of contracted Australian fine iron ore agreed between Rio Tinto and Asian mills.

 

"I don't see Rio giving in as they can sell on spot for a better price. Why would you? And while the Chinese can wave their arms all they want, the fact is the (spot) price is going up," said James Wilson, a mining analyst for DJ Carmichael & Co.

 

SPOT THE DANGER

 

If there is no deal by next Tuesday, a deadline set by Rio Tinto, it could stop contractual sales and instead negotiate prices on a cargo-by-cargo basis -- a big gamble for China, which is now importing about half of the world's traded iron ore.

 

Massive iron ore stockpiles built up after record imports this year will provide some immediate buffer for mills if supplies come to an abrupt halt, but in reality the shift is underway -- Rio has sold half its ore on a spot basis this year.

 

"The Chinese are likely building inventories to aid in their negotiations to drive down the price of iron ore... They don't need 75 million tonnes of inventory to support high levels of industrial production growth," said FBR Capital Markets analysts.