Tuesday, May 19, 2009

Japanese, Korean Steelmakers In Final Bid To Save Iron Ore Benchmark System

Japanese and South Korean steelmakers have launched a final attempt to save the benchmark system of annual iron ore negotiations – a cornerstone of the industry for 40 years – opening the door to a compromise with the big miners.

The steel mills, led by Nippon Steel, JFE Steel and Posco, are in talks with the miners Vale, Rio Tinto and BHP Billiton about a price cut of about 30-35 per cent, some distance from their initial attempt to achieve a 50 per cent reduction for the 2009-10 long-term contracts.

For the miners, it would also be a concession after offering a 20 per cent cut initially.

The push comes as the talks between the Chinese steelmakers, which have led the benchmark negotiations since 2005, and the miners remain deadlocked well beyond the traditional deadline of April 1.

Beijing, represented by Baosteel and the China Iron and Steel Association, has not deviated from its initial request, made in December, of a 40-50 per cent cut.

The jammed talks have raised the possibility of both sides failing to reach an agreement for 2009-10, with long-term supplies moving from an annually negotiated – or benchmark – price to sales on the basis of spot prices.

Japanese and South Korean steelmakers appear willing to compromise as they are reluctant to abandon the benchmark system.

A deal, however, is not certain and conversations are ongoing, people familiar with the talks said.

Roger Agnelli, Vale chief executive, suggested this week that the talks were in their final phase.

“The delay has already started to inconvenience companies,” he said.

Mining executives acknowledge that it remains an “open question” whether a benchmark deal could be settled for all or whether some customers, such as the Chinese steelmakers, would opt to buy at spot prices.

Shan Shanghua, Cisa secretary-general, on Tuesday warned that Chinese steelmakers would reject a benchmark deal if the prices were too high.

“No matter what level of price cut the Japanese and Korean are going to take, we are not going to accept anything below 40 per cent,” he told the Financial Times.

“This is not about concession,” Mr Shan added. “We will try our best to maintain the benchmark system but, if we are pushed too hard, we do not have any other way out [than to move to spot prices].”

Gao Gezhi, purchasing manager of Jianlong Steel, a mid-sized mill in Tangshan, echoed Cisa’s view, warning that a 30-35 per cent cut was not enough. “At that level, Chinese mills are still losing money.”

The probable drop in prices for 2009-10 would break with six consecutive years of increases totalling 500 per cent, which had been propelled by the industrialisation of China, the world’s largest iron ore consumer.

Iron ore supplies are key to the global economy as they filter down into steel and ultimately into goods such as cars.

Source: Financial Times

No comments: