Chinese Steel Mills Receive Rio Tinto Price Offer

Price Is Double 2009 Benchmark

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.

Baosteel Faces Difficult Second Half-Year

Company Looking for Alternative Iron Ore Sources

The chairman of the group company of Baosteel, China’s leading steel manufacturer says that the Chinese steel sector is likely to face difficulties in the second half of the year amid a slowdown in the real estate sector.
Speaking on the sidelines of an industry conference in Beijing, Xu Lejiang told reporters "In the second half of the year it is uncertain whether the yuan will appreciate, whether interest rates will rise.

"There is also the property market, and fixed asset investment could also fall."
Real estate development in China saw Chinese steel mills through the global economic crisis against a steep fall in exports but the government is trying to keep a lid on surging property prices and is set to legislate against speculation.

But the industry has also been affected with raw materials costs also rising and with the three global mining giants, Rio Tinto, BHP Billiton and Vale moving to quarterly prices against annual contracts.
The China Iron and Steel Association (CISA) said at a press briefing earlier this month that mills were now free to secure their own individual deals with their suppliers and Mr Xu confirmed Baosteel was currently sourcing iron ore from foreign miners on a temporary price basis, however he warned the conference that the advantages currently enjoyed by the big thre miners were unlikely to last.

"Across the world, iron ore isn't a scarce resource but it's just that in recent years, the ability to supply iron ore has not matched the development of the steel industry, especially the Chinese steel industry," Mr Xu said.

The three miners have been able to exert considerable control over the volumes of new iron ore reserves available to the market but their high price demands would push steel mills to develop alternative supply sources, he added.

"In two or three years the demand and supply situation will see a big improvement," he added.

China Steelmakers Sign Quarterly Deals - Reports

Low Iron Ore Stocks Force Steel Mills' Hand

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.

Australian Trade Minister Rejects Calls For Iron Ore Boycott

"Market Should Determine Price" - Crean

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.

Vale Asks For 100 Per Cent Price Increase

Brazilian miner Vale S.A. has asked Chinese steel mills for an increase of between 90 and 100% in the 2010 iron ore benchmark price, the China Iron and Steel Association Vice Chairman Luo Bingsheng said on Friday.

Vale first proposed a 90% increase, then later increased this to 100%, Mr Luo said at an industry conference.