News Room - Steel Industry

Posted on 03 Feb 2010

Miners want 40 pct iron ore price rise

Australia's big miners are asking their Japanese and South Korean customers to accept a 40 percent contract iron ore price hike in 2010, a Chinese newspaper reported, as rising demand puts pressure on the region's steel mills to settle early.

 

Although unconfirmed, traders described the hike as a "reasonable" reflection of market demand and strong spot prices, as global steel markets begin to recover after a fraught 2009 and Chinese imported ore demand surges beyond last year's record of 628 million tonnes.

 

The 21st Century Business Herald quoted a source close to Australia's Rio Tinto and BHP Billiton as saying that the first round of talks with Japan and South Korea had been completed, with the mills already resigned to price rises but still unable to agree by how much.

 

Steel companies in Japan were not immediately available to comment when contacted by Reuters, but analysts expressed concern that the Japanese market might not be robust enough to sustain such a big hike.

 

"It's quite possible miners are demanding a large price increase this year in anticipation of a strong rebound in demand... although overall demand remains weak for now," said Toshihiro Nagahama, analyst at Dai-ichi Life Research Institute.

 

"It would be totally impossible for mills to fully pass on the higher cost to users, particularly in the domestic market, which is struggling with deflation," he said.

 

THE CHINA PRICE

 

The China Iron and Steel Association (CISA) said at the end of last year that foreign miners were expected to seek a 20-30 percent increase in benchmark prices for 2010, and made it clear that such an increase was unacceptable.

 

But the 21st Century Business Herald report said local mills -- now led in the talks by Baosteel -- would be prepared to agree to a price rise in the region of 20-30 percent, although they were unwilling to go any higher than that.

 

Baosteel refused to comment, but a trader based in eastern China said the figures being suggested on both sides were within expectations.

 

"I think 40 percent sounds like a reasonable figure to me, but of course the steel mills will say they can't accept more than 30 percent because that is part of the negotiation process."

 

Analysts said Chinese mills might feel some pressure to settle quickly and avoid last year's long and probably costly fiasco where insistent demands for special China price ended in a failure to agree to a contract.

 

"The Chinese must be facing some pressure to settle. With spot prices coming off the boil it would make sense for them to try and strike a deal before the Lunar New Year," ANZ senior commodity analyst Mark Pervan said.

 

Spot iron ore benchmark prices provided by the Steel Index have fallen by more than $11 in just over three weeks from contract highs, down to $120 at the end of last month, but since then prices have started to tick up again to $121.50 .

 

But the big miners were widely believed to be ignoring China and seeking a benchmark agreement with Japan and South Korea instead.

 

Pervan said miners would likely have a better chance of winning a bigger benchmark price rise from the comparative small Japanese and South Korean steel industry.

 

That in turn could be used to pressure Chinese buyers into a matching deal.

 

"The Chinese know they used up a lot of goodwill from the miners last year and the temptation must be to settle early at say 28 percent rather than wait for a deal with Japan or Korea."

 

Last year's talks led by CISA ended in stalemate, with the association being criticised over its inflexible negotiating tactics when its attempt to strongarm the miners into offering a lower "China price" ended in failure.

 

Chinese steel firms were eventually forced to accept the "interim" benchmark price agreed by Rio Tinto with Japanese mills.

 

But the trader based in eastern China said even without the complex political disputes that have dogged the negotiations over the past year, it would still be unlikely that the two sides could hammer out a settlement quickly.

 

"It is probably a good time to strike up an agreement but you have to realise that this is a very complex process involving a huge Chinese steel industry -- they aren't going to settle early."