Monday, September 14, 2009

2010 Iron Ore Benchmark Talks Set To Begin

Discussions with the Chinese about iron ore pricing for 2010 are scheduled to begin next month, even though no benchmark prices have been set for this year.

The talks are looming as China's iron ore imports slump, falling 15 per cent in August to 49.6 million tonnes, the lowest level this year, as the country produces a growing glut of steel thanks to overcapacity in the sector.

"Overproduction is the main reason for the 18 per cent correction in spot steel prices during the past five weeks," Morgan Stanley analyst Jing Ulrich said yesterday.

"China's largest producer, Baosteel, recently lowered the price of its major steel product by 6 per cent for October, following cuts of up to 19 per cent by several major Chinese steel mills. Prices of iron ore and major steel products could stabilise in the near term."

The lower imports are understood to be the result of a combination of higher Chinese domestic production and the mining giants selling ore to their more traditional markets, such as Japan and Korea.

"China is still a positive force for demand but the big question that will drive commodity prices now is what is happening out of Europe and the US," an Australian analyst said.

Chinese press reports said iron ore pricing talks for 2010 would start next month.

The China Iron and Steel Association -- which fronted the talks for the first time this year, a move widely been seen as a disaster -- will take a back seat this time, leaving China's largest steelmaker, Baosteel, to resume its customary lead role. Other big producers will also be involved.

"CISA has been criticised -- although not openly -- by mills and people in the industry (who claim) that it missed the best opportunity in setting a better price when the market dropped to lowest early this year," one analyst said.

"It was not flexible enough, by insisting on a 40 per cent reduction, and left no room for compromise."

Despite China's face-saving deal with Fortescue for a price for the six months to December 31, it seems the Asian giant is still keen on an annual benchmark.

"China didn't want to break the iron ore price talk scheme completely. China only wants a better price. The half-year price (with FMG) is an unexpected outcome. It's a temporary settlement. So China won't be seeking a price based on half a year or quarterly," another analyst said.

Until China can better organise itself, Japan and South Korea were likely to be the industry's price setters, an Australian analyst said.

"Next year Japan and Korea will probably set a benchmark again because they seem to want the security of a benchmark."

Although an annual benchmark with China has not been agreed to, industry sources said the fact Rio was still selling into the Asian giant at a provisional price meant there was effectively a settlement. However, the way prices were settled had changed for good.

Petra Capital resources analyst John Veldhuizen said the demise of the benchmark had been "brewing" for a while.

BHP Billiton last week signed an eight-year iron ore supply agreement with South Korean steelmaker Hyundai Steel covering 22 million tonnes.

The terms of the deal were not released, but it is understood the contract for new volume is not based on the annually negotiated benchmark price and is likely to be index-based or reset quarterly.

The mining major said late in July that just 23 per cent of its 2009 iron ore volumes were signed at the benchmark annual price agreed to by Rio Tinto with Japanese, Korean and Taiwanese steel mills.

Source: The Australian

No comments: