Chinese steel mills have expressed outrage as Vale and BHP propose an iron ore price of $160 per tonne for the third quarter.
"BHP has recently informed us that they will raise third quarter iron ore prices, including freight, to 160 U.S. dollars a ton, which is unacceptable for us," according to an official from a large steel mill.
"We will become unprofitable with such prices on the back of a persistent fall in steel prices," the source said.
The price is 23 percent higher than that in the second quarter.
One source suggested that the price was unreasonable given the fall in spot prices in recent weeks.
"We will see a complete loss in the steel industry if the much-talked-about price is inked, and most small-sized mills will go bankrupt," said Chu Xueliang, an analyst at China Jianyin Investment Securities.
"We estimate that the acceptable price for Chinese steel mills is around 130 U.S. dollars per ton in the third quarter," Chu said.
Rio Tinto has delivered its official iron ore price offer for the second quarter of this year to Chinese steel mills. According to sources within the Chinese steel industry, the offer was received on Friday.
The free-on-board price for fine ore with grade of 63.5 per cent was about $US123 per tonne and around $US138 per tonne for lump ore. With ocean freight added on, the price is around $US135 per tonne – around double the 2009 benchmark price agreed with Japanese and Korean steelmakers.
The China Iron & Steel Association admitted last month that the country's mills and the large iron ore miners had reached private price deals on iron ore supply, even as negotiations continued.
The offer means the end of the annual benchmark system and a move to quarterly pricing.
Brazil's Petrobras has signed an agreement with Saudi Arabia's Modern Mining Holding Co. to study plans to build a $450 million calcined petroleum coke plant in Saudi Arabia.
The plant, to be built in Jubail, on Saudi Arabia’s east coast, is expected to produce 700,000 mt of calcined coke a year using raw petroleum coke – ore ‘green coke’ - produced by Petrobras’ refineries. The plant is scheduled to open in 2012.
The two partners in the joint-venture will provide equal amounts of finance for the project and are looking for capital from government and non-government banks.
Vale Deal Will Give Access to 100 Years of Supplies
Norway’s Norsk Hydro has agreed to take over bauxite, alumina and aluminum assets from Vale SA for $4.9 billion, securing 100 years’ worth of bauxite supplies and making the Brazilian miner its second-largest shareholder. Bauxite is refined into alumina, which is separated during smelting to produce aluminum.
The deal will give Hydro access to raw materials used in aluminum production and will enable it to become less reliant on mining companies supplying bauxite and alumina.
Hydro is paying $1.1 billion in cash, giving Vale a 22 percent stake and taking on about $700 million of net debt in return for the assets, the company said on Sunday. Hydro is taking control of Paragominas in Brazil, the world’s third-biggest bauxite mine, and 91 percent of Alunorte, the largest alumina refinery, as part of the deal. The company will have a 51 percent stake in the Albras aluminum plant and 81 percent of the CAP alumina project.
Hydro’s Chief Executive Officer Svein Richard Brandtzaeg described the deal as a “transforming transaction” at a press conference yesterday in Oslo. The assets will “significantly improve” Hydro’s financial position and secure bauxite supplies “in a 100-year perspective” according to a statement released by the company. Vale said yesterday it expects the transaction will create “substantial value” for shareholders.
The deal will bring the Norwegian government’s stake in Norsk Hydro down to 34.5 per cent from 43.8 per cent previously. The country’s Minister of Trade and Industry, Trond Giske, said Norway’s ambition is to bring the holding back up towards 40 percent.
Vale looks set to focus on expanding iron ore production. On Friday it said it was paying $2.5 billion for iron ore deposits in Guina from BSG Resources (Guinea) Ltd.
Brazilian miner takes 51 per cent in BSG Guinea JV
Brazilian miner Vale has bought a majority stake in a division of mining company BSG Resources in Guinea, at a cost of $US2.5 billion.
The stake will give Vale access to what it referred to as being among the best deposits of iron ore in the world.
"Guinea will be a player on the world iron market within four years and could be the number three producer in six years," Mines Minister Mahmoud Thiam said. "This decision will also kick-start other mining projects in Guinea."
Production at the Simandou South property known as Zogota will begin in 2012 with 10 million tonnes of iron ore rising to 50 million tonnes by 2015, Vale said. The deal also gives Vale access to exploration blocks Simandou North 1 and 2.
It will pay $US500 million up front for a 51 per cent stake in BSG Resources (Guinea) Ltd and the remaining $US2 billion in subsequent payments.
The joint venture has committed to renovate 660 kilometres of railway on which Vale plans to export the iron ore via Liberia.
BSG Resources is controlled by Israeli billionaire diamond trader Beny Steinmetz and
has oil and gas projects in Russia and Nigeria, and copper, diamonds and iron ore mines in Africa, and an engineering arm,.
Vale is also in talks with Liberia about a possible concession there and may seek a stake in the Belinga iron ore project in Gabon which was offered to a Chinese company. It is expected that Vale will form a joint venture for Belinga.
China Allows Steel Mills To Sign Individual Contracts
The lobbying body for the Chinese steel industry, the China Iron and Steel Association (CISA), has acknowledged that Chinese steel mills have signed individual deals with global miners, but it said that iron ore price negotiations are continuing
"Considering the operating pressure and difficulties of steelmakers, they [the steelmakers] can now talk with the big three miners and buy iron ore at provisional prices under CISA's regulations," said Vice-chairman Luo Bingsheng.
Despite this Mr Luo said that price negotiations were ongoing: "It is totally the individual business of companies," he said. "They [the miners] offer a price we don't accept, that doesn't mean the end of negotiations. The price talks are still going on."
CISA previously refused to allow Chinese steelmakers to sign contracts until a national benchmark price had been agreed. Despite previously suggesting that a deal would be done-and-dusted by 1 April talks have dragged on with seemingly no end in sight.
CISA also asked domestic steel companies and traders to stop buying iron ore for the two months from Vale, BHP and Rio Tinto to protest against the price monopoly.
Earlier reports said some Chinese steel mills have accepted a quarterly pricing regime, based on the previous three months' average spot prices or at a price agreed by steel mills in Japan and Korea. The prices were said to be around 90 per cent higher than the previous benchmark price and were to run for a period of just three months from 1 April instead of the customary one year’s duration.
China is the world’s biggest importer of iron ore.
"Current negotiations have not been negotiations" - CISA chief
Iron ore price talks between Chinese steel mills and the big three global iron ore suppliers - Vale, BHP Billiton and Rio Tinto - have been suspended, Luo Bingsheng, vice-chairman of the China Iron and Steel Association told reporters on Tuesday.
"The current negotiations have not been negotiations at all because no buyers have been given a say (in deciding prices)," Mr Luo said at a briefing.
He added that the monopoly status of the three big three suppliers meant that they were no longer considering the interests of their customers, he said.
He said China would take a strategic approach to resolving its dependence on foreign ore suppliers by trying to encourage domestic iron ore output.
Meanwhile spot prices in China fell on fears that government measures regarding the property market would curb demand for iron ore. This follows rising property prices in China.
On 24 April China’s securities regulator announced moves that requires developers to submit fund-raising plans for review, adding to curbs imposed by the central bank on loans for third-home purchases, increased down-payment requirements and higher mortgage rates.
Iron ore prices have soared, reaching $189.50 last week for 63.5 percent-content iron ore in Chinese ports while import prices averaged $96.31 a ton in the first quarter. However, steel stockpiles rose earlier in the year as the Chinese property sector appears to have cooled in the light of rising prices and more regulation.
However, Mr Luo said that steel inventories have dropped 9 percent to 9.77 million tons as at 23 April.
Reports from China suggest that some Chinese steelmakers have signed private pricing contracts on a quarterly basis with global iron ore suppliers.
The China Economic Times cites an unnamed executive at China’s largest steel mill, Hebei Iron and Steel Group, as saying that several of the company's subsidiaries had no choice but to accept the quarterly pricing proposal as their ore reserves would last last until mid-May.
"Some steel mills, including us have accepted the new quarterly pricing system, based on the previous three months' average spot prices," a sales executive from another large steel mill told China Daily.
"The China Iron and Steel Association (CISA) has issued a document asking steel mills not to sign iron ore contracts with the three big miners until the final negotiations are completed. But we cannot stop production and hence most of the steel mills have signed contracts privately like they did last year," he added.
The Shanghai Securities Journal suggested on Monday that Chinese steelmakers were basing these deals on Vale's agreement last month with Japanese and Korean mills that resulted in a 96.4% rise on last year's benchmark to about $110 a metric ton.
Official sources have denied the reports.
Some analysts estimated that the uptrend in iron ore prices would be short-lived, as most traders have started to show pessimism on market prospects.
The three global miners - Vale, Rio Tinto and BHP Billiton - broke the 40-year tradition of selling iron ore on an annual contract basis this year opting instead for a quarterly pricing system.
China's Ministry of Commerce has announced that it will launch an investigation into the big three global miners’ monopoly over the iron ore trade while defending the traditional benchmark system of pricing. This follows moves by the big three international mining giants to end the 40-year-old system.
"The commerce ministry's anti-trust bureau is currently studying the issue," ministry spokesman Yao Jian said on Thursday. Mr Jian said the benchmark system offered a transparent, stable and foreseeable trading platform for both the suppliers and buyers and enabled the two sides to control production costs and balance their interests but he warned that China's booming iron ore market would become more rational as it diversified supply channels at home and abroad, said Yao.
He pointed out that the number of countries China was sourcing its iron ore from had risen from 10 to 20 in recent years. Chinese steel mills had reduced their reliance on imports, with the percentage of imports falling between 50 and 60 per cent this year.
Chinese steel mills have yet to agree a 2010 price with miners BHP, Rio Tinto and Vale despite other Asian steel mills having agreed price increases of over 90 per cent and a move from annual to quarterly contracts.
The chairman of the China Iron and Steel Association has blasted iron ore miners for their attitude towards their Chinese customers.
Speaking at an industry conference, Luo Bingsheng said that the miners are no longer negotiating but dictating prices to their customers.
"There are no negotiations any more," Mr Luo said "now it's 'I say the price, you must accept, or else we will stop supplying you.'"
Mr Luo accused miners Vale, BHP Billiton and Rio Tinto of "a high degree of monopoly" in the supply of seaborne iron ore.
He added that while steel prices have risen sharply the domestic steel industry still faced the challenges of global protectionism, sharply higher inventory levels and slow consolidation in the industry.
Industry or Government May Instigate Investigation
A report in China suggests that the country’s government is likely to investigate suspected monopoly abuse by the world's three iron ore mining giants.
The report, in the Economic Information Daily, cited an unnamed legal expert as saying that the three companies – Vale, Rio Tinto and BHP Billiton – are highly coordinated in the supply, transportation, and pricing of iron ore which, it said indicates a clear monopoly abuse.
The paper quote the legal expert as saying there were two ways to launch an investigation into foreign companies' monopoly. The ‘victim’ firms can file a monopoly case with the government and the government can then start an investigation. But if the monopoly has a negative impact on China's economy, the relevant government departments can initiate the investigation themselves.
Armco & Metawise (H.K.), Ltd, a subsidiary of US-based metal importer, China Armco Metals, Inc. has established a strategic partnership with Asian commodity broker, TCG Commodity Management.
TCG will source a number of high demand minerals as part of the Company's recent strategy to seek longer term supply contracts for distribution in China and has agreed to provide A&M preferential access to supplies of Manganese, Pig Iron and Iron Ore from Brazil, and Coal from Colombia.
Mr. Kexuan Yao, CEO and Chairman of China Armco Metals, Inc. said, "There is currently a supply-demand imbalance in China, with many core industrial minerals and metals. While this is largely attributable to China's strong growth, there are a number of other factors that contribute to this problem including market inefficiencies, differences in business culture and communication challenges. We believe these factors are very prominent in South America where a vast supply of these materials can be sourced into China. This is why we are convinced this partnership opens the door to a very large opportunity for us. First, TCG is unique because it has deep experience in Asia, with a management team that has been financing trades in the Asia region for decades, coupled with an established infrastructure in Brazil. TCG has a wealth of business relationships in Brazil in marketing, banking, and legal and has facilitated billions of dollars worth of international commodities transactions in numerous countries. We know of no other company with this particular balance. Second, TCG has direct access to mines and can enable us to obtain product without having to build our own origination system in South America."
Van Carter, Chairman and CEO of TCG Commodity Management, LLC, said "This business is dependent upon four factors. First is the ability to bridge the differences in business culture, communication and regulation that exist between China and Brazil. Second is the ability within Brazil, to establish deep personal and professional relationships to secure access to mineral products. Third is the ability to secure favourable pricing and delivery terms, which is a direct function of our access to capital. Through our relationship with A&M, we now have direct access to end-users in China, which is the fourth essential element of a successful business. This is a win-win for both companies."
Brazilian steelmakers could sell off their iron ore mining units following the success of Vale SA’s recent 90+% price rise for its iron ore products.
In a report on Monday, Brazil’s Banco Bradesco SA said that Cia. Siderurgica Nacional SA and Usinas Siderurgicas de Minas Gerais SA may accelerate plans to spin off their mining units after Vale achieved a price hike of over 90% in negotiations with Japanese and Korean steel mills. CSN and Usiminas have already planned initial public offerings of their iron ore divisions.
Banco Bradesco’s Raphael Biderman said that iron ore IPOs would be successful because they have established businesses that will gain from higher prices. He estimated that CSN may raise $10 billion after its shares doubled in the past year along with Usiminas.
Australia’s Federal Trade Minister Simon Crean has criticised calls from China for a two-month boycott of iron ore purchases from the ‘Big Three’ global miners.
A report over the weekend said that the China Iron and Steel Association (CISA) has urged the boycott in protest at what it claims is a price monopoly by Rio Tinto and BHP Billiton, and Vale.
CISA urged steelmakers and traders to use up what it claimed to be a two-month stockpile of iron ore in the nation’s ports before buying again from the large global miners.
Last week steelmakers in other Asian countries such as Japan and South Korea agreed to accept price increases of almost 100 per cent for iron ore supplies over the next three months; however Mr Crean said that calls for a boycott went against the spirit of the market.
"You've got to let the market determine the price. You can't be issuing directives in terms of restricting supply," he said.
Mr Crean suggested that China should seek market-based remedies such as helping to improve efficiency and iron ore supply from Australia.
"That's the way you get the balance back between demand and supply. To simply try and do it through central edict defeats the whole purpose of functioning as a market," he said.
Mr Crean suggested that CISA’s call would fall on deaf ears and that a boycott was unlikely to succeed because demand for iron ore in China was so high.
Chinese steelmakers are still in talks with the three large mining groups over a benchmark price, however there are fears that the benchmark pricing system may be coming to an end. Traditionally, prices have been set annually for the period from 1 April to 31 March each year; however with spot prices around double previous contract prices miners have been trying to impose quarterly pricing contracts on their customers. Although steelmakers in Japan and South Korea have agreed to quarterly pricing Chinese steelmakers – and their government – are known to want the annual pricing mechanism to continue.
China is the world’s largest consumer of iron ore.
A report from China suggests that the China Iron and Steel Association has asked domestic steel companies and importers to stop buying iron ore from Vale S.A, BHP Billiton Ltd. and Rio Tinto PLC for the next two months. The report, in the state-run newspaper, the Shanghai Securities Times, says that CISA has made the request in protest against what it sees as a price monopoly by the world’s three biggest iron ore miners.
China’s iron ore stocks currently stand at 75 million tonnes, enough for two months’ production, the newspaper said, citing CISA Secretary-General Shan Shanghua.
The newspaper also reported that they boycott is aimed at what it describes as "unreasonable requests for price hikes" from the global iron ore producers' and their move to a quarterly pricing system.
CISA met with steel mills on Friday to discuss strategy over the ongoing iron ore talks.
South Korean steelmaker POSCO said on Friday that it has agreed with Brazilian iron ore miner Vale a provisional price of $100-105 a tonne for iron ore. The price will run during the April-June quarter. The price is an increase of 86 per cent on its previous price.
"The agreement is provisionally made. Depending on the final decision, the prices will be applied retroactively," Choi Doo-Jin, public relations team leader at POSCO, told Reuters by phone. Mr Choi added that talks were continuing. Talks are still continuing with Rio Tinto and BHP Billiton.
Posco will review whether to raise its steel prices after talks on raw material prices are completed.
Major Japanese steelmakers and Brazilian miner Companhia Vale do Rio Doce are expected to agree to an increase in the price of iron ore of almost 100 per cent to about $110 per metric ton by the end of this month, the Yomiuri Shimbun has reported.
The paper said that Japanese steelmakers also are negotiating prices with two other mining companies – BHP Billiton and Rio Tinto - and will reach agreements on similar prices.
It is also likely that they will agree to the introduction of a new system under which prices would be reviewed every three months, a move that could lead to a further increase in July.
The average price for spot trades has risen to between $130 to $150 per ton since February--up from $60 a tonne last spring.
Despite hinting earlier this week that it may back a shift to quarterly contracts, Baosteel Group Corp., China’s lead negotiator for annual ore price talks with global miners, on Friday emphasised that it supports the existing system of pricing iron ore once a year. However, the company acknowledged that the 40-year-old format could be altered.
A company media official told Dow Jones Newswires that media reports on Thursday citing Chairman Xu Lejiang's remarks – made on the sidelines of a shipping conference in Shanghai - had missed the context setting out Baosteel's support for the existing system.
"The benchmark annual pricing system was set up 40 years ago, and miners, steel mills and the market have changed a lot since then, so it is reasonable that the system has some changes and adjustments now," the Baosteel official said, repeating what he said were Xu's actual remarks.
"But Baosteel supports the long-term annual contract system. This system is beneficial for steel mills and raw material suppliers to build a long-term and stable relationship based on cooperation. It also benefits the stability and prosperity of the industry chain."
The end seems to be in sight for the four-decade old system of iron ore benchmark pricing after Baosteel Group, representing China in the iron ore price talks, said that it was reasonable to expect adjustments in the way the commodity is prices.
Baosteel chairman, Xu Lejiang said today in Shanghai that the break with the traditional method of agreeing an annual price has led to tensions between the miners – Rio Tinto, BHP Billiton and Vale – and the steelmakers led by Baosteel.
“The contract pricing system needs improvement, and some adjustments are reasonable,” he said. “There’s still an iron ore supply shortage now,” Mr Xu added, “but the situation will turn around.”
Vale, the Brazilian miner which is the largest iron ore exporter, is seeking shorter-term contracts that could boost prices by between 90 percent and 110 percent, and wants to price iron ore on a quarterly basis in talks with customers. Meanwhile Sam Walsh, the head of iron ore at second largest miner, Rio Tinto said yesterday that “the customers are well and truly aware of the pressure on annual prices. The system is broken.” The third largest miner, BHP Billiton, wants to move to index-based pricing.
Traditionally, prices were set annually from 1 April each year.
East China Mineral Exploration and Development Bureau (ECE) is to buy the Itaminas iron ore mine in Brazil for $1.2 billion. The two companies signed a letter of intent on Wednesday according to Winbros, a consultant hired by Itaminas for the transaction.
The mine has debts of $400 million and an estimated reserve of 1.3 billion tonnes of iron ore reserves and is said to be able to produce 25 million tonnes per annum with additional investment,
ECE, which has assets in Indonesia, Australia and Mexico, last September took a controlling stake in London-listed African copper miner Weatherly International Plc which has four copper mines in Namibia.
