Vale SA, the world’s biggest iron- ore producer, is resisting Chinese demands for record price cuts as the steel industry recovers from its biggest collapse since World War II.
Vale agreed last month to a 28 percent lower price on iron ore supplied to Japanese steel mills under annual contracts, the first reduction in seven years, while China pressed for a discount of as much as 45 percent. Iron ore in the open market has jumped 38 percent since this year’s contract prices were first set, weakening China’s position.
Chief Executive Officer Roger Agnelli said June 25 that he won’t give Chinese customers bigger discounts in what have become the longest-running price talks ever. China’s detention of iron-ore executives from Rio Tinto Group, the world’s second-largest iron-ore exporter, on allegations of espionage has created a split between Australia and China that may also benefit Vale, according to McKinsey & Co.
“The possibility of Chinese steelmakers achieving a bigger discount is very, very unlikely,” Paul Cliff, a mining analyst with Nomura Securities in London, said in a July 22 interview. “Either the Chinese agree to the current benchmark already set or they buy on the spot market.”
Vale, based in Rio de Janeiro, has risen 35 percent in Sao Paulo this year, compared with a 45 percent gain for the Bovespa stock index. Rio advanced 97 percent in London, while BHP Billiton Ltd., the world’s third-biggest iron-ore exporter, rose 23 percent. Rio is based in London and BHP in Melbourne.
China’s steel output, which accounts for about half the world’s total, rose 1.2 percent in the first half, the World Steel Association said July 20. Production will climb about 5 percent this year as the nation’s $586 billion infrastructure stimulus package takes effect, according to Gilberto Cardoso, an analyst with Banif Securities in Rio.
The recent slump in global steel industry production, with many companies operating at half usual output levels, marks the biggest collapse since World War II, according to the World Steel Association.
The Chinese Iron & Steel Association didn’t immediately return calls from Bloomberg News seeking comment.
This year’s contract talks between China and producers such as Rio and BHP began in January and passed the June 30 deadline without an agreement, becoming the longest-running in the 40-year history of setting annual prices. Vale, Rio and BHP control about 70 percent of the seaborne trade in iron ore.
Vale may report second-quarter net income of about $1.12 billion on July 29, according to the median of three estimates in a Bloomberg survey, compared with $5.01 billion a year earlier, after prices fell. Iron ore contributed about 73 percent of the company’s $19 billion of earnings before interest, tax, depreciation and amortization, known as EBITDA, last year.
China depends on imported ore because more than half the nation’s 800 million tons of iron-ore reserves are unviable at current prices, said Sigurd Mareels, a Brussels-based consultant with McKinsey. Iron content in Chinese mines is lower than Vale’s Carajas ore, according to London-based CRU, which provides data and pricing on commodities.
Contract prices are tumbling after Rio and BHP won gains last year of about 85 percent before the economic crisis led to slumping demand. Vale vowed this year to wait for its competitors to reach agreements with steelmakers first after it secured a lower price increase last year of about 65 percent.
Jose Carlos Martins, head of Vale’s ferrous-metals business, said in February Vale wouldn’t be the traditional “price setter” in contract talks this year.
“Politically Vale has done well with its customers by letting the Australians settle first,” Cliff said.
In the first quarter, China took 66.5 percent of Vale’s total iron-ore sales of 52.1 million metric tons, up from 32 percent a year earlier.
“The benchmark is already set,” Agnelli said June 25, referring to the agreements with steelmakers in Asia and Europe for 2009 deliveries of iron-ore fines, the most commonly-traded product. “But we won’t leave the Chinese without ore.”
Vale may benefit from China’s dispute with Rio over allegations that employees of the company allegedly stole state secrets, according to McKinsey’s Mareels. The country, which buys 70 percent of the world’s seaborne iron-ore supplies, detained four Rio executives on July 5. The investigation has strained relations between China and Australian Prime Minister Kevin Rudd.
The China Iron & Steel Association is holding price talks with Vale instead of Rio after the detentions, the Australian Financial Review reported July 16, without saying where it got the information. A Vale spokeswoman said July 24 that the company has no additional comment following the statements already made by Agnelli on iron-ore pricing.
The number of spot iron-ore vessels booked from Brazil to China rose to a record in July while those from Australia dropped, Reuters said July 22, citing freight broker AXSMarine.
Since Agnelli’s June 25 statement, prices for Indian spot ore sold into China have risen to $95 a ton, the highest this year, according to London-based publication Metal Bulletin. Prices are now about 19 percent higher than contract prices.
Vale is “strong enough to resist Chinese demands´´ for concessions, said Robert Meyer, a Dusseldorf-based vice president of Research & Consulting Group, in a July 22 interview.
China’s ore imports, which rose 29 percent in the first half, will exceed 50 million metric tons a month until the end of 2009, boosting global seaborne trade in iron ore to a record 880 million tons this year, according to McKinsey’s Mareels.
“Spot prices will rise further as other markets outside China recover,” Banif’s Cardoso said in a telephone interview.
Vale may reopen its 7 million-ton-a-year Gongo Soco mine in Brazil’s Minas Gerais state in “coming months” amid signs of economic recovery, Agnelli said July 7.
China’s economy has grown at an average rate of more than 9 percent a year over the past decade and should continue at that clip, Barclays Capital analysts including Christopher LaFemina said in a July 17 research report. That will fuel higher demand for steel and iron ore, he said.
“We expect infrastructure development in emerging economies to be a driving factor of above-trend steel demand growth for many years,” Barclays said.
Source: Bloomberg
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