Replies to post #98 on The Rising Influence of Rising Affluence

[DewDiligence]

BHP Follows Suit, Cuts Iron Price for Japanese Mills

[BHP’s new contract price for iron ore sold to Japanese steelmakers is essentially the same as the prices these mills already negotiated with Rio Tinto and VALE. Still no agreement between the big-3 miners and the Chinese steelmakers.]

http://online.wsj.com/article/SB124474000700906821.html

›JUNE 12, 2009
By DENNY KURIEN

SINGAPORE -- BHP Billiton Ltd. and a Japanese steel mill have struck a deal to cut iron-ore prices, matching a benchmark deal reached with fellow miner Rio Tinto.

Brazil's Vale SA, the biggest iron-ore producer and exporter in the world, also has settled 2009-10 prices with Japanese and South Korean mills.

As Australia-based BHP Billiton has become the third major miner to settle iron-ore contract prices with Japanese steel mills, a pattern appears to be emerging in the trio's efforts to single out Chinese mills to get them to accept similar terms.

But China has been standing its ground and is seeking a 40% price cut. China is the world's biggest importer of iron ore, accounting for more than half of the global seaborne trade in the key steel-making ingredient.

That leaves a deal with Chinese steel mills the most important indicator of the outlook for the sector in the year ahead.

According to London-based industry publication Steel Business Briefing, BHP and JFE Holdings, Japan's second-largest steelmaker by volume after Nippon Steel, have agreed to a 32.95% reduction in the price of iron-ore fines, a type of low-grade ore, and a 44.47% reduction in the price of high-grade lump ore for 2009-10.

That is similar to the 33% to 44% price cuts agreed to between Anglo-Australian miner Rio Tinto and Japanese and South Korean steel mills in May.

Among major Japanese and South Korean mills, BHP has only reached an agreement with JFE, the SBB report said. BHP spokesman Illtud Harri declined to comment on the report. [Posco, Korea’s biggest mill, is not yet officially on board, but it presumably will be—see below.]

The settlements put China's bigger steel mills, led by China Iron and Steel Association and Baoshan Iron & Steel Co., under further pressure to accept the accords as reference prices for the contract year ending March 31, 2010.

Posco Chief Executive Chung Joon-yang already has said the company will likely conclude talks with BHP soon, at price levels similar to those reached with Rio Tinto.

Vale's latest agreement shows its iron-ore fines prices will decline 28% from last year, while lump prices will fall 44%. Prices of iron pellets, much prized for their efficient use in blast furnaces, will fall 48.

Vale, Rio and BHP together account for about 70% of the iron ore shipped globally.

Vale also has struck iron-ore supply deals with 38 small Chinese steel mills that will together import about 50 million metric tons of ore this year. These privately owned mills aren't members of the China Iron and Steel Association.

Chinese steel-industry officials have said that they want a 40% price cut from Vale and a 45% cut from BHP and Rio. [The slightly lower % cut desired from VALE would even out the prices from the big-3 miners insofar as VALE’s 2008 contract price with Chinese mills was slightly lower than than BHP’s and Rio’s.]‹

[DewDiligence]

Everything You Wanted to Know About VALE's Carajás Mine

http://www.mining-technology.com/projects/Carajás/

›The Carajás Mine is the world's largest iron ore mine and is located in the state of Para in Northern Brazil.Fully owned by Brazilian miner Vale (VALE), the mine holds over 1.5 billion tons of iron ore in reserves.

The Carajás region boasts the richest reserves and concentrations of iron ore anywhere in the world and was discovered entirely by accident in the late 60s when a US Steel Helicopter was forced to land on a hill in the area to refuel. Surveyors on board noted the baron state of the hill and subsequently discovered that the iron content was as high as 66%.

Other mineral deposits were discovered later; Carajás is rich not only in iron ore but also ores for manganese, copper, tin, aluminum, and even gold.

US Steel wanted to develop the Carajás iron deposit but the Brazilian Government was unwilling to hand control over to a foreign company. Brazil is currently the world's largest exporter of iron ore with annual production of over 200Mt.

In 1970, the Brazilian government opted instead to create a joint venture company, Amazonias Mineração SA (AMZA), of which 51% was owned by Vale and 49% was owned by US Steel.

US Steel subsequently withdrew from the joint venture in 1977 by selling its share to Vale for $55m [huge mistake, obviously]. Vale is expected to announce in 2008 the results of a tender for the expansion of the Carajás mine. The $2.48bn project, "Carajás 130," will add 30 million tons a year to the current capacity of 100 million tons a year, the company says.

Geology and reserves

The Carajás ores are found within Archaean iron formations. The volcanic sequence has been weathered to a depth of between 100m and 150m, while oxidation is observed to a depth of up to 500m in the BIFs of the ore zone.

The upper 80% of the reserve comprises a soft, friable enriched limonite near surface passing down into hematite to a vertical depth of around 300m. Hematite rich, but harder and more siliceous pods occur within the soft hematite, but also as a transition to the un-enriched BIF at depth.

The Carajás District contains known reserves of the order of 18 billion tons with an average grade of 65.4% Fe. The reserves are distributed in a number of deposit groups, the largest of which is the North Range with - 6,200Mt @ 65.8% Fe, 0.038% P, 1.0% SiO2, 1.05% Al2O3, 0.45% Mn, 0.01% S, 0.02% KO, 0.03% Na2O and 1.88% LOI. The other reserves include: South Range, 35km to the south – 10,400Mt @ 66.3% Fe; East Ridge – 400Mt @ 65.9% Fe; and South Felix Ridge – 600Mt @ 62.8% Fe. The current production contains < 1% Al2O3, < 1% SiO2, < 0.03% P2O5 and < 0.3Mn, with about 10% lump and 90% fines.

Mining

The operation utilises an open pit mining complex with an initial capacity of 35 million tons a year (tpy) – soon to be extended – a deep-water port near the city of Sao Luis, in the Northeastern State of Maranhao, with a handling capacity of vessels of up to 280,000dwt, and a single track 1.6m gauge railway line of approximately 890km interconnecting the mine to the port.

Production

Vale's iron ore production for 2007 at Carajás was 296 million metric tons, an increase of 12% on the previous year. [Production will be lower in 2009, of course.]

The Carajás Mine also relinquished: 17.6 million metric tons of pellets; 247,900 metric tons of finished nickel; 9.1 million metric tons of bauxite; 4.3 million tons of alumina; 551,000 metric tons of aluminium; 1.3 million metric tons of kaolin; 2,500 metric tons of cobalt.‹

[DewDiligence]

Chinese Steelmakers Outsmart Themselves and Now Have No Contract for Iron Ore

http://online.wsj.com/article/SB124638501713674455.html

›Big Miners, Flexing Muscle, Balk at Beijing Trade Group's Request to Shave 40% Off the Cost of Last Year's Contract

JULY 1, 2009
By ANDREW BATSON and SHAI OSTER

BEIJING -- China's steel industry failed to reach a supply deal with the world's major iron-ore producers by Tuesday's informal deadline, highlighting the challenges the resource-hungry nation faces in trying to shift the balance of power in global commodities markets.

The world's largest steel-producing country started annual talks on the key raw material during the depths of the financial crisis, as commodity prices collapsed and prospects for the world economy turned bleak. The China Iron & Steel Association, a government-backed body that coordinates the industry, argued for cutting contract iron-ore prices nearly in half from last year.

Its position never changed -- but market conditions did, with most Chinese steelmakers ramping up output since early this year on signs that government stimulus is boosting demand for their products.

The steel association found itself isolated in its insistence on a cut of at least 40% from last year's contract price. Major Japanese and Korean steelmakers have already reached separate iron-ore supply contracts based on price cuts of 28% to 33%, which the mining companies say should be the global benchmark.

ArcelorMittal, the world's single largest steel producer, negotiated a 28% cut in its contract with Brazilian miner Vale SA. Few expect China can get a lower price -- especially since many smaller Chinese steel mills have ignored the association and also done separate deals.

"Being a large consumer of commodities has not given China a lot of pricing power," said Scott Kennedy, an Indiana University political scientist who studies China's negotiating strategy. "The failure is a signal that the Chinese industrial-policy machine has problems."

The China Iron & Steel Association declined to comment Tuesday, when many of the supply contracts China negotiated last year expire. Global miners BHP Billiton and Rio Tinto Ltd. also declined to comment on the talks, but said they expect to continue supplying China even without long-term contracts. "If customers opt to buy on the spot market instead, they will," said Rio Tinto spokesman Gervase Greene.

With China's steel output already back to last year's record levels, steelmakers have been buying more iron ore on the spot market, pushing imports to new highs. That undermined the association's position that China's market is so weak that it can't accept less than a 40% cut. And prices for iron ore imported into China are now up about 12% since April's lows. They are even higher than the long-term contracts others have negotiated, so letting the contracts lapse looks like less of a good deal.

"It's hard to have a united front. The small- and medium-sized steel companies in particular cannot just stop production to wait for the final result of the negotiation," said Zhu Fengliang, who heads a steel industry group in the western province of Shanxi.

…"The Chinese have an unenviable negotiating position in iron ore. If anything they need more of it than they did before," said Michael Komesaroff, a mining consultant with Urandaline Investments.

Lower global prices for iron ore have made supplies from China's own high-cost mines less competitive, he said. The result is that China's steelmakers have this year become more dependent on imports, not less. Domestic iron-ore output, as of May, was down 6% this year.

Few Chinese steel companies now want to stay in the association's framework for iron-ore purchases, said Jia Junyan, a private iron-ore trader in Shanxi province. "No one wants to wait and end up with what will probably be a bad deal," he said. "The steel companies have lost faith in the China Iron & Steel Association. It's embarrassing. No one wants to listen to them," he said.‹