The Rising Influence of Rising Affluence

[DewDiligence]

Rio Tinto, Nippon Steel Ink Iron-Ore Pricing Contract

[RIO is the world’s third-largest producer of iron ore after VALE and BHP. The big question is what kind of benchmark contract the “Big 3” iron miners will ink with Chinese steel companies—if any. VALE has stated that it will be more than happy to price its iron ore according to the spot market if no benchmark price can be negotiated.]

http://online.wsj.com/article/SB124331472445053657.html

›MAY 26, 2009, 2:52 A.M. ET
By ALEX WILSON

MELBOURNE -- Rio Tinto Ltd. said it has struck a deal with Japan's Nippon Steel Corp. for a 33% to 44% drop in iron ore term prices for the 2009-10 contract year that started April 1.

This is the first deal of the year as other major miners such as BHP Billiton Ltd. and Companhia Vale do Rio Doce, as well as key consumers such as Chinese steel mills, are still negotiating 2009-10 prices.

The price cut announced by Rio and Nippon isn't as deep as Chinese steel makers have been pushing for and it remains to be seen if the Chinese side will accept the settlement as a benchmark for the year or hold out for further price reductions, undermining the already ailing benchmark pricing system.

Rio Tinto said it has agreed on a price of 97 U.S. cents per dry metric ton for iron ore fines, compared with US$1.446 last year, and US$1.12 a ton for lump, down from US$2.0169 last year.

"We believe this settlement is a realistic outcome for both parties -- one that reflects the global market for iron ore and the current challenging market conditions facing our customers," Rio Tinto Iron Ore Chief Executive Sam Walsh said in a statement.

After the announcement, a senior official at a Chinese government-owned steel maker said China won't be changing its stance on not accepting a cut of less than 40%. [This could well be a bluff, of course.] He said the China Iron and Steel Association is meeting now to discuss Rio's settlement with Nippon.

An official at Baoshan Iron & Steel Co. declined to comment. Baosteel, as the company is known, is the biggest steel maker in China and has been leading the Chinese side in annual price negotiations.

China is the world's biggest importer of iron ore, accounting for more than half of the global seaborne trade in the raw material, a key component in steel. China believes it should be setting the benchmark in the annual talks between miners and mills.

The China Iron and Steel Association has said Chinese mills want a price cut of between 40% and 45% to reflect weaker market conditions, and that if the benchmark was set offshore, China wouldn't accept a cut of less than 40%.

When contacted, a Posco official in Seoul said the Korean steel maker is yet to agree on prices with any of the miners.

"Iron ore talks for this year are not over yet," company spokesman Kim Dong-ho said, without elaborating.

An Australian mining analyst said the price of iron ore fines, agreed by Rio and Nippon, were higher than what the market had been expecting. This is positive for iron ore miners, he said, though it is unclear how China will respond.‹