Firstenergy Corp. (FE)

[mhlld]

Mills don't like Rio move on Hope Downs
By Michael Weir
July 8, 2005

Japanese and Chinese steel mills are furious over Rio Tinto's 11th-hour deal to snatch control of the Hope Downs development, fearing it will further strengthen the power of the Pilbara's two dominant iron ore suppliers.
Already reeling from the 70 per cent price increase won by the miners earlier this year, Japanese steel mills believe Rio's deal to take management control and a 50 per cent stake in the Hope Downs development further tightens its grip on the crucial supply side.

Gina Rinehart's massive Hope Downs project had received strong support from the Japanese and Chinese iron ore buyers because it was seen as a potential alternative supplier and a way to break the BHP Billiton-Rio Tinto duopoly in the Pilbara.

"Some Japanese steel mills, if not all, will be disappointed," said one Japanese industry source, who did not want to be named.

West Australian Premier Geoff Gallop is touring Japan and in an interview with the steel mill mouthpiece The Tex Report moved to head off any unrest.

Dr Gallop is quoted as saying "we have established a long-standing trust-based relationship with Japan" and "we would like to continue the good relationship into the future".

While the close relationship between Japanese steel mills and Australian iron ore producers dates back to the development of the Pilbara in the 1960s, there has been tension over pricing.

Now with demand outstripping supply it is the miners holding the upper hand but the Japanese have warned they will "have things to say" when the market reverses.

"There are strong times and not so strong times but when the supply side over-utilises that power, the mill side will remember when the market reverses," the industry source said.

"The mines and mills must live together and that is how the industry should run: on balance. There is always good and bad times but if one side wants to overpower things it will be an awkward relationship."

Mitsubishi had been considered a front-runner to strike a deal with Mrs Rinehart's Hancock Prospecting before Rio Tinto's move and it's not the first time the steel mills have tried to put a foot on the supply side.

The Japanese steel mills strongly backed Anglo American's attempts in 2000 to take over North, the majority partner in Robe River Iron Associates, a battle ultimately won by Rio Tinto.

But the world's leading suppliers, Rio Tinto, BHP Billiton and Brazil's CVRD, are constantly annoyed that they have to deal with a buyers' cartel in Japan, where most steel mills accept the prices negotiated by the giant Nippon Steel group, while producers are expected to negotiate individually.

A Rio Tinto-led attempt by the big producers to form an equivalent selling group in the early '80s was met with outrage by the Japanese steel mills and led to a buyers backlash against Rio Tinto (then known as CRA). There was another outcry by steel makers in 1999 when news broke that Rio and BHP had been discussing a possible merger of their iron ore operations.

The West Australian

http://www.smh.com.au/news/business/mills-dont-like-rio-move-on-hope-downs/2005/07/07/1120704492624....