China "May Have To Pay Spot Prices" - Forrest

Fortescue Metals Group Ltd chief Andrew Forrest says China may have to pay spot prices for iron ore if it doesn't accept the contract prices set with Japan as the new benchmark.

Mr Forrest said China's steel makers will either have to accept the new iron ore prices its rival miner Rio Tinto Ltd struck with Japan this week or choose the "dangerously volatile" spot price.

Major producers would not agree to a different benchmark price with China, he said.

Chinese steel makers are pushing for cheaper iron ore prices than the 33 per cent discount struck this week by Japanese and Korean steel mills with Rio Tinto.

"As a major importer of iron ore, which Japan has been - it founded the Pilbara and will always be a major importer of iron ore - if they have now set a price and it doesn't get followed, then that is fine," Mr Forrest told journalists in Sydney.

"But those that choose not to follow it have to have the alternative, which is the spot price."

Rio Tinto, the world's second-largest iron ore miner, on Tuesday agreed to new 2009 contract prices for fine and lump iron ore from its Hamersley Iron operation with Japan's biggest steel maker Nippon Steel Corporation.

It agreed to supply Nippon with fines at a 33 per cent discount to the 2008 contract price, and lump at a 44 per cent discount to last year's price.

But China's steelmakers are pushing for a price reduction of around 40-45 per cent and BT Investment Management resources analyst Tim Barker said this week they would probably hold out for the better deal.

"I don't think there will be a quick settlement with the Chinese," Mr Barker said.

Iron ore prices have dropped due to weak demand caused by the global economic slump.

South Korea's top steelmaker Posco said on Thursday it had negotiated a deal with Rio Tinto at the same prices set by Nippon.

Posco, the world's fourth largest steelmaker, said it would buy iron ore for $US58.2 ($A75.02) to $US68.9 ($A88.81) per tonne.

It remains in talks with other major iron ore suppliers, including BHP Billiton and Brazil's Vale, about prices for the current contract year.

Mr Forrest said the iron ore spot price was highly volatile.

"If they don't accept the Nippon/Rio new benchmark, they will consign themselves to the spot market and that certainly in the past has shown extreme upside volatility.

"I think the whole of the industry would prefer a benchmark.

"The spot price is dangerously volatile.

"Whichever way China goes will have very formative impact on the future of the global seaborne iron ore trade."

Mr Forrest said he was confident of China's recovery from the economic downturn and said Chinese demand for iron ore was strong.

"We think that China's recovery is absolutely certain."

Asked if production was tracking with guidance, Mr Forrest said the "trend was very healthy".

Mr Forrest was also asked if the sales guidance of 26 million tonnes for 2008/09 still stands.

"I think we will probably be upgrading that, but let me get back to you," Mr Forrest said.

Mr Forrest also said Fortescue was "absolutely serious" about listing on the Shanghai stock exchange.

The plan follows Chinese mill Hunan Valin Iron and Steel Group Company acquiring a 17 per cent stake in Fortescue last month.

Source: Sydney Morning Herald