Rio Tinto Group, the world’s second- largest iron ore exporter, has agreed to a 33 percent cut in contract prices with Japanese steelmakers, the first decline in seven years as the global recession slashes demand.
Nippon Steel Corp., the world’s second-biggest steelmaker, agreed to pay Rio 97 cents a dry metric ton unit for its benchmark product in the year started April 1, London-based Rio said today in a statement. Goldman Sachs JBWere Pty had forecast a 40 percent drop from last year’s record.
Rio’s shares reversed a decline and rival Australian iron- ore exporters surged on optimism the agreement will set a global benchmark for contract prices, which had risen more than fivefold since 1999. Chinese steel mills, the world’s biggest producers, are likely to resist the accord after calling for prices to be as much as halved.
“What looks like a pretty good deal might end up being a bit tougher when they come across the Chinese,” said Mark Pervan, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne. “Historically you could say this is a done deal, when Rio strikes with Nippon, well everyone follows, but I get a feeling maybe the Chinese have got something else in store.”
The price accord is the second-highest on record, according to Bloomberg calculations. “The fines settlement is better than most brokers expectations for a 35 to 40 percent fall,” Marcus Padley, a broker at Paterson Securities Ltd., wrote in his trading newsletter, Marcus Today.
Nippon Steel spokesman Hayato Uchida confirmed an agreement with Rio at the cited prices. JFE Holdings Inc., Japan’s second- biggest steelmaker, agreed to the same prices, according to a spokesman for the company, who declined to be named. Kobe Steel Ltd., Japan’s fourth-largest producer, also reached an agreement for a 33 percent cut, said Ryuichi Nakagami, a company spokesman.
Sumitomo Metal Industries Ltd., Japan’s third-largest steelmaker, also reached agreement with Rio on the same conditions, said Nobuaki Masuda, a spokesman for the company.
Posco, Asia’s third-biggest steelmaker, is still in talks with Rio, Choi Doo Jin, a spokesman for the Pohang, South Korea- based company, said by telephone.
“I can’t comment because we need to study” the accord, said Ding Shouhu, the iron ore price negotiator for Baosteel Group Corp., China’s largest steelmaker. “We haven’t got in touch with Rio for two weeks. Rio hasn’t set a time for the next round of negotiations with us.”
The worst recession since World War II has slashed demand for autos and building materials, cutting profits for steelmakers and ore producers. Spot prices for iron ore into China have dropped 66 percent from their February 2008 record.
The price of iron ore for immediate delivery, including the cost of freight to China, rose 0.8 percent to $67.50 a ton for the week ended May 22, according to Metal Bulletin. The cost of freight from Rio’s Dampier port in Australia to Qingdao port in China rose to $10.75 a ton in the week ended May 15, according to prices from SSY Futures Ltd., a unit of the world’s second- largest shipbroker.
“This settlement is a realistic outcome for both parties, one that reflects the global market for iron ore and the current challenging market conditions facing our customers,” Sam Walsh, Rio’s iron ore unit chief executive, said in the statement.
After taking into account an expected loss on aluminum, iron ore may generate about 85 percent of Rio’s earnings in 2009, JPMorgan Chase & Co. said in a report this month.
Nippon Steel agreed to pay 112 cents per dry metric ton unit for Rio’s premium Pilbara Lump product, 44 percent lower than last year’s contract price, the statement said. Rio last year won an 80 percent gain in fines prices with Asian customers and a 97 percent rise in lump prices.
Vale SA, the world’s biggest iron-ore producer, last week said it was waiting for rival BHP Billiton Ltd., the third- biggest exporter, and Rio to reach an accord before deciding prices for the year. Melbourne-based BHP spokeswoman Kelly Quirke declined to comment on the progress of BHP’s iron ore talks with customers. The stock rose 1.2 percent to A$34.29. BHP has been pushing to scrap the benchmark contracts in favor of an index linked to spot prices.
“The market consensus was a 30 to 40 percent cut,” said Kazuhiro Harada, an analyst at Tokyo-based UFJ Mitsubishi UFJ Securities Co. “The settlement won’t have a big impact on earnings forecast as the rate of the cut is seen to be in line with the companies’ expectation.”
China, the world’s biggest consumer of iron ore, has previously wanted a price cut of between 40 percent and 50 percent. Calls to Shan Shanghua, secretary general of China Iron and Steel Association, weren’t immediately returned.
Source: Bloomberg
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