Steel Firms Close In On Cheaper Iron Ore
www.affo.com.cn AFFO 17th,Apr,2009
Secretive iron-ore price-contract talks between the world's biggest miners and steelmakers are breaking in favor of the steelmakers, which will likely win steep discounts from last year's prices.
'The period of huge profits for imported iron ore is over,' predicts China Iron & Steel Association General Secretary Shan Shanghua.
This week, Posco, one of the world's biggest steelmakers, said that because of the economy and weak demand, iron-ore prices should be half their 2008 levels, which would mean 2009 prices of about $40 to $45 a metric ton.
Posco expects the negotiations -- which had stalled as both iron-ore producers and steelmakers waited for a clear picture of the global economy -- will wrap up this month. Some smaller iron-ore producers, including Fortescue Metals Group Ltd. in Australia, were preparing for at least a 30% cut in current prices.
Earlier this year, the iron-ore producers were hoping to keep 2009 prices at the 2008 level. But by February, they were hoping to take just a 20% cut. Now it looks increasingly likely that the cut will be at least 30%, analysts said.
Both BHP Billiton and Rio Tinto said they wouldn't comment until the talks are complete. 'BHP Billiton does not comment on customer negotiations,' said a company spokesman.
But Sam Walsh, who heads Rio Tinto's iron-ore division, has said he thinks 50% is too steep a drop. He would not disclose what price he thought negotiations would eventually produce.
Iron producers such as Rio Tinto, BHP Billiton and Brazil's Cia. Vale do Rio Doce were hoping that various stimulus proposals around the world would spur demand from steelmakers, which need iron ore to produce steel for automobiles, machinery and construction.
But that hasn't happened. This week, Rio Tinto said its iron-ore production fell 15% from a year earlier in the 2009 first quarter. BHP and Vale are also expected to show a decline. And world steel demand isn't likely to improve before the summer at the earliest. That means iron-ore producers have little leverage with steelmakers in the 2009 talks because those contract prices are locked in from April to April.
BHP Billiton wants to eliminate the current 12-month system and would like prices to be set by the spot market or some other index. Current spot prices are hovering around $50 a metric ton, up from the low of $36 late last year but still off their highs of $120. Vale and Rio Tinto have favored contract pricing because it offers more stability.
Some smaller steelmakers and iron-ore producers have already worked out side deals independent of the major negotiations. Cotton & Western Mining Inc., a small iron-ore producer in Houston, Texas, announced that it has settled on a sales price of about $45 a metric ton for its customers in China for 2009.
Some analysts have predicted that China, essentially the arbiter of iron-ore prices, will need nearly 100 million metric tons less iron ore in 2009 than it needed in 2008. Nearly 80% of the iron ore produced around the world is sold to China's steel mills.
Zou Jian, a consultant at China Metallurgical Mines Association, said iron-ore imports will reach 350 million metric tons, down from 443 million metric tons in 2008. Part of the reason for the drop, he said, is that China is developing more domestic iron ore.
'The price gap is quite wide as miners are demanding a 20% reduction but we believe it has to go down by at least 50% from the 2008-09 level,' said Kwon Young-tae, Posco's vice president of raw-material procurement, in a press release.
