Replies to post #25 on The Rising Influence of Rising Affluence

[DewDiligence]

CLF investors evidently liked the new benchmark pricing for iron ore, despite
this bearish-sounding article from Reuters. The stock was up 6% yesterday.

http://www.reuters.com/article/marketsNews/idAFN2647840720090526

›Global Iron Ore Price Cut Seen Impacting N. America

Tue May 26, 2009 4:45pm EDT
By Steve James

NEW YORK, May 26 (Reuters) - U.S. iron ore pellet producer Cliffs Natural Resources (CLF) might have to drop prices following a settlement by mining leader Rio Tinto to cut its iron ore price by 33 percent for some Asian steelmakers, analysts said on Tuesday.

But they saw little immediate impact on steel prices which have already started to rise again after a bleak nine-month period in which demand fell away in the economic downturn.

In any case, most integrated American steelmakers have their own sources of iron ore -- a key raw material for steel -- while about half the producers make steel from scrap instead, they noted.

"Cliffs will have to lower prices," said Michael Locker, of steel industry consultant Locker Associates.

Charles Bradford, of Affiliated Research Group, said AK Steel (AKS.N: Quote, Profile, Research, Stock Buzz) was the biggest manufacturer that relied on outside ore purchases. "AK is naked (exposed) when it comes to iron ore.

"They have a contract with Cliffs, which is more than the world price," he said following the news that No. 2 iron ore producer Rio Tinto agreed to cut iron ore prices to Japanese steelmakers by a third in this year's first contract settlement, which traditionally sets the benchmark for other contracts.

Christine Dresch, a spokeswoman for Cleveland-based Cliffs, the largest North American producer of iron ore pellets, said there was a system of "provisional pricing" for Chinese customers until the benchmark was set.

"Following today's settlement, we will continue talking with our customers," she told Reuters.

Another spokesman, Steve Blaisden, later explained that, for North American customers, Cliffs had a formula-based pricing system, which took into account three factors -- the pellet price, current steel pricing and the company's costs. [CLF has stated this on its quarterly CC’s.]

Traditionally, the first deal reached by a major ore supplier becomes the benchmark price in a decades-old system of setting iron ore prices on the basis of annual negotiations, a process now under threat from growing spot market trade.

Since 2002, the iron ore price has quadrupled as economic growth led a boom in demand for steel. But in the current economic downturn, that demand has dwindled and iron ore producers had been widely predicted to cut prices. Some analysts expect Chinese firms to balk at the new benchmark and demand even bigger price cuts.

Last month, Cliffs reported a first-quarter loss and said iron ore pellet sales volume slumped 27 percent to 2.0 million tons, and revenue per ton was down 2 percent at $76.50.

The shares of integrated U.S. steelmakers rose on Tuesday after the announcement. AK Steel closed up 65 cents, or 5 percent, at $13.42 on the New York Stock Exchange. U.S. Steel Corp (X) rose 4.2 percent to $30.73 and ArcelorMittal (MT) ended the day 4.9 percent higher at $30.41. Cliffs rose 6 percent to $24.55.

Locker noted that most integrated U.S. steelmakers will only be affected indirectly. "Only those buying iron ore on a spot basis will be impacted, since most integrated producers have captive mines or buy on contract."

He noted Europe-based ArcelorMittal, the world's largest steelmaker, buys some ore from Cliffs. Bradford said although ArcelorMittal has about 65 percent of its own iron ore globally, it has to buy the rest.

Michelle Applebaum, an independent steel industry analyst in Chicago, said U.S. Steel's domestic operations are completely integrated but the company gets as much income from its European operations.

"Net-net, it's a modest negative for domestic blast furnace companies," she said. For electric furnace companies, some use ore as a scrap substitute. "But scrap prices have collapsed and they are already seeing the benefits of that."

Applebaum said that according to trade press reports and steel buyer input, U.S. steelmakers have announced a variety of price increases for some beams and other long products ranging from $20-$40 per ton, or about 3 percent to 6 percent.

"China is taking the lead at raising steel pricing again, but it tends to be affected by scrap rather than iron ore. There is a big lag too, and this is the first iron ore settlement since September, so ... the cuts were expected," she said.

Locker said the ore benchmark cuts would likely have "a dampening effect on prices going up."‹

[DewDiligence]

China’s Holdout on Iron-Ore Pricing Looks Iffy

[Please see #msg-38113508 for background.]

http://online.wsj.com/article/SB124384853338771693.html

›JUNE 2, 2009
By ANDREW PEAPLE and CHUIN-WEI YAP

China's steelmakers seem to be fighting a losing battle in this year's iron-ore price negotiations. But they may help bury the current price-setting system.

China's Iron & Steel Association is refusing to follow the 33% cut in the iron-ore contract price that leading steelmakers in Japan and South Korea agreed to with Rio Tinto. Instead, CISA wants a reduction of 40% or more because of weaker demand for steel as China's economy slows.

Unfortunately [for Chinese manufacturers—for miners, this is fortunate :- )], macroeconomic numbers point the other way. Monday, China's manufacturing purchasing-managers-index data were again above the expansionary level of 50. China's iron-ore imports hit record volumes in March and April. Steel prices have been creeping up since late April, after a prolonged slump.

What's more, iron-ore spot prices are now rising. Leading miners are unlikely to agree to long-term contract prices much below the current spot price, making CISA's chances of success look remote.

Nonetheless, its resistance is another crack in the price-setting system. Previously, steelmakers have tended to fall in line once a few leading firms on either side of the negotiating table set a benchmark price.

That started to fall apart last year, when Australian miners Rio Tinto and BHP Billiton negotiated a higher iron-ore price than Brazil's Vale. China's stance is now showing the buying side is also less than cohesive.

BHP has suggested contract prices be set in line with some kind of price index; others have called for a move toward spot pricing and the development of an iron-ore futures market. The current standoff may eventually help force the adoption of one of these alternatives to the anachronistic system now in place.‹

[DewDiligence]

Rio Tinto Dumps Chinalco, Inks JV with BHP

http://online.wsj.com/article/SB124411140142684779.html

›JUNE 5, 2009
By DANA CIMILLUCA, SHAI OSTER and AMY OR

Anglo-Australian mining giant Rio Tinto walked away from a proposed $19.5 billion deal with Aluminum Corp. of China, dealing a blow to China's ambitions to buy access to raw materials crucial for its economic growth.

The proposed deal would have given state-owned Aluminium Corp., known as Chinalco, an 18% stake in Rio Tinto, the world's third-largest miner and owner of rich iron-ore and copper mines in Australia and elsewhere. It also would have given the Chinese company direct stakes in some mining assets.

In addition, the investment would have extended a spending spree in which Chinese companies have laid out billions of dollars to acquire mining and energy assets around the world.

But Chinalco's plans fell victim to a potent mix of shareholder opposition, economics and politics, partly reflecting fears -- especially in Australia -- of the consequences of giving China direct access to a huge trove of natural resources. The deal's collapse came just days before Australian regulators were expected to set tough conditions for their approval of it.

Rio Tinto moved quickly to line up other sources of cash to pay off $19 billion in debt coming due later this year and in 2010. Friday in Australia, the company said it planned to raise $15.2 billion by selling new stock to its shareholders in a rights issue. It said the move would reduce its net debt to $23.2 billion.

The company also turned to a former suitor, mining titan BHP Billiton. The two companies agreed to combine their western Australian iron-ore assets in an equally owned joint venture, with BHP paying Rio Tinto $5.8 billion. [The $5.8B payment by BHP is to offset the larger value of the assets being contributed to the JV by Rio Tinto.]

Iron ore is a crucial steelmaking ingredient and has been the subject of tense talks with Chinese steelmakers, who are seeking lower prices from the world's largest iron-ore exporters, which include BHP and Rio Tinto. In a statement Friday, Chinalco Chairman Xiong Weiping said it was disappointed in Rio Tinto's pullout and will keep a watch on the miner's joint venture plans. Zou Jian, executive director of the Chinese Iron and Steel Association, said he couldn't yet call the proposed joint venture a new monopoly but said antimonopoly measures were available if monopolistic tendencies began to show.

The deal's collapse casts a shadow over China's plan to use its cash reserves to increase the global reach of its state-owned companies, particularly in the natural-resources sector. It also caps a turbulent two years for Rio Tinto, which was pursued by BHP before that proposed marriage fell apart.

Rio Tinto struck the Chinalco deal because it needed cash to pay back $8.9 billion of debt coming due in October, part of a debt load totaling almost $40 billion. The deal called for Chinalco to invest $7.2 billion in Rio Tinto in the form of convertible bonds and take $12.3 billion in stakes in a group of its mining assets. It would have given Chinalco two board seats.

But a run-up in Rio Tinto's share price since the deal was struck in February made it increasingly uneconomical for the London-based company.

The deal faced opposition from the beginning from Rio Tinto shareholders because it would dilute their holdings. They also worried the company was selling prized assets at the bottom of the market. The opposition grew as Rio Tinto shares rallied, making the convertible-bond portion of the deal increasingly attractive for Chinalco.

Rio Tinto Chairman Jan du Plessis crisscrossed the globe in recent weeks discussing the Chinalco deal with shareholders, who would have needed to sign off on it. He had said he wouldn't submit a deal to them that they weren't likely to approve.

China's appetite for resource and energy assets has triggered a backlash. Some critics said a major Chinese presence in such a key sector of Australia's economy posed a threat to national security. Critics also charged that Chinalco would seek to leverage its position in Rio Tinto to get lower iron-ore prices as a means to prop up China's economic growth.

Chinalco said its bid was motivated purely by commercial interests, as it sought to diversify away from the weak aluminum-refining market into different metals and mining operations.

The demise of the Rio Tinto deal will bring up painful memories for China of another failed natural-resources foray: offshore oil company Cnooc Ltd.'s attempt to takeover Unocal Corp. of the U.S. four years ago. That deal fell apart after U.S. lawmakers raised concerns about the ties between China's government and businesses.

Afterward, China turned inward, and then focused on Central Asian, African and Latin American countries, where it could more easily win contracts. Lately, it has started to use loans to secure the resources it seeks, doing multibillion-dollar oil deals with Russia, Venezuela, Kazakhstan and Brazil.

Chinalco's experience, however, differs from Cnooc's. Rio Tinto was a willing partner, at least initially. Chinalco worked unusually hard, by Chinese-company standards, to raise its overseas profile and to grant foreign media access after the deal was struck.

The failure of the deal has allowed Australia's government to dodge a bullet of sorts. The country's Foreign Investment Review Board was due to decide on the deal by June 14. While the board has already approved several smaller Chinese transactions, the Chinalco deal was the most politically sensitive of all, given its size.

The Australian government recently approved a US$1.21 billion offer by China's Minmetals Corp. to acquire mining assets from OZ Minerals Ltd., after Minmetals revised its offer. The original takeover offer would have included reserves close to military zones.

But Australia's opposition Liberal-National coalition party said last month that it opposed the Rio-Chinalco deal, adding that it wasn't in Australia's national interest since it would give Chinalco "direct management involvement and a high level of influence."

The outcome is unlikely to slow China's overseas push, as its companies seek to take advantage of depressed asset prices. Moreover, Chinalco won't be left empty-handed. Rio Tinto will owe it a $195 million break-up fee.‹

[DewDiligence]

VALE Cuts Iron-Ore Prices to Japan/Korea by Smaller % Than Rio Tinto

[This news was interpreted as modestly bullish and VALE’s shares rose 0.5% today. The big question is how much VALE will charge Chinese steelmakers and whether there will even be a benchmark price for these buyers. VALE previously stated that it will be more than happy to sell at the spot-market price if a benchmark price cannot be negotiated with the Chinese buyers—see #msg-38315328 for a related discussion.]

http://www.reuters.com/article/marketsNews/idAFN1044975120090610

›Wed Jun 10, 2009 2:51pm EDT

June 10 (Reuters) – Brazilian mining giant Vale on Wednesday said it cut prices to steelmakers in Korea and Japan, following a similar price cut by Australian rival Rio Tinto.

The move, which responds to a slowing global demand for iron ore, gives Vale a strong position in upcoming talks with Chinese steel mills that are seeking even larger price reductions.

The following are details of Vale's price arrangement with Korea's POSCO and Japanese steelmakers Nippon Steel, Sumitomo Metal Industries, Kobe Steel Ltd, and Nisshin Steel Co.

* IRON ORE FINES: Vale reduced fines prices 28.2 percent from 2008 levels, taking the new reference price per dry tonne Fe unit to $0.85 for Southeastern System fines (SSF), $0.90 for Carajas sinter feed (SFCJ). [The Carajás mine in the northern state of Para produces VALE’s highest-quality iron ore and hence it warrants a slightly higher benchmark price than VALE’s other iron mines, which are collectively called the “Southeastern System.”]

This is a slightly smaller reduction than the 33 percent cut that Rio Tinto gave to the same countries [#msg-38113508].

Australian miners in 2008 won a bigger price hike than Vale in benchmark talks that took place just as commodities prices fell due to the financial crisis.

Brazil's iron ore is generally considered higher quality than Australian ore and tends to receive a premium.

Analysts say fines are a key part of Vale's production portfolio. Chinese steel makers rely heavily on fines.

* IRON ORE LUMPS: The company cut lumps prices by 44.5 percent from last year's price for a new price of $0.99 for Southeastern System lump and $1.01 for Southern System lump.

Analysts say Vale, as well as Rio, rewarded Japan and Korea for honoring commitments they made last year to buy iron lumps by giving them a considerably larger cut than for the fines heavily used by China.

Chinese buyers were quick to defer annually contracted cargoes when prices on the relatively new but growing spot market were more attractive.

* PELLETS: Vale cut the price for blast furnace pellets by 48.3 percent from 2008 levels for a new reference price per dry tonne Fe unit of US$1.1043.

Analysts said the large cut in pellets price was not surprising because the product, which has more specific uses and is less fungible, has been among the hardest to sell amid slowing demand for ore.

With lower prices, Vale could boost production from pellet plants that were slowed or idled due to the limited demand.

Vale in May said pellets accounted for 8.1 percent of its gross first-quarter revenues, compared to 38.7 for different types of iron ore. The earnings statement did not say how much of the gross iron revenues came from fine and lump sales.‹