Asian steelmakers may lose their battle for a steep cut in annual iron ore prices, as firm spot prices of the commodity and steady steel output growth in China, the world's top steelmaker, outweigh a glum outlook elsewhere.
Steel mills facing pressure to cut prices from struggling car makers, shipbuilders and electronics firms have pressed for a quick iron ore settlement before the end of April, but few analysts and traders see any immediate prospect of a deal as miners eye recent signs of economic recovery.
By delaying talks past the April 1 deadline, miners are now in a favourable position to concede less than the swingeing cut of 40 or 50 percent steelmakers sought, especially following glimmers of recovery in China's economy.
Although China's crude steel production fell 0.3 percent in March from a year earlier, its output continued running at a high rate even as excess supply hurt domestic prices.
"Further delay will obviously benefit miners more than steel firms, as the overall trend increasingly supports the view that the economy will recover," said G.J. Kim, an analyst with Samsung Securities.
"But we don't expect it to be protracted unusually longer as things can reverse amid rising iron ore inventory in China."
The world's top three producers of iron ore, BHP Billiton, Rio Tinto and Vale, who control two-thirds of global seaborne trade in ore, are already preparing for a recovery in China with higher output targets.
Rio Tinto said on Wednesday its annual iron ore output would rise 14 percent this year and reported almost unchanged output last quarter from the fourth quarter, despite sharply decreased global demand, as it hopes for demand recovery from China in the second half. Brazilian miner Vale said on Monday there were signs of demand recovery from China.
"The market could actually tolerate a 60 percent cut in contract prices, but what we can do?" said an iron-ore trader based in Anhui in China. "The big three miners are effectively a monopoly and I think they will hold out for a 30 percent cut."
Japanese steel firms led by Nippon Steel (5401.T) agreed with Toyota Motor (7203.T) to cut steel prices by around 10 percent and media reports said prices could fall again when cheaper raw materials under a new contract will be used. [nT286976]
The latest Reuters survey of six analysts forecast iron ore prices to fall around 35 percent, between a 20 percent cut suggested by miners and a cut of up to 50 percent demanded by steel firms.
Despite the signs of a recovery, China, home to about 700 steel mills, is overproducing at an annualised rate of 530 million tonnes, well above its targeted 8 percent cut to 460 million, as small and medium mills react promptly.
That would mean China could see record imports of iron ore over an extended period of time and weak spot iron ore prices may halt their slide in support of miners, who are facing steel output cuts of as much as 50 percent in other major producing countries.
Spot prices of iron ore have traded steady in recent weeks at around $64 a tonne, a factor favouring miners, as demand for a cut of 40 to 50 percent means contract prices would be signed at an unusual discount to spot prices.
"Iron ore suppliers showed willingness to compromise, as witnessed by the fact that Rio Tinto proposed a 20 percent drop in temporary prices," said Jiro Lokibe, a Daiwa analyst.
"Nevertheless, there is a rift between the two parties. If iron ore spot prices, which are showing signs of bottoming, rebound, both parties may compromise partly because a new fiscal year has already started."
POSCO said last week Rio Tinto had offered a preliminary 20 percent cut in iron ore term prices, but it was unclear when final negotiations would be concluded, due to the wide price gap.
Source: Reuters
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