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.
Contract prices of Australian iron ore may rise 32 percent in the July quarter over the previous three months, the Japan Metal Daily newspaper said.
Based on a calculation being put forward by iron ore miners BHP Billiton and Rio Tinto contract prices may rise from around $120 a tonne in the April to June quarter to around $158 a metric ton in the quarter from July to September.
The new amount is apparently derived from the three-month average of the iron ore spot price from March to May on the assumption that the market price stays at its current level until the end of this month.
At $158 a ton, iron ore would cost 2.6 times more than it did in the year ended 31 March.
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.
Iron ore price talks are “beset by differences” according to the chairman of one of China’s largest steel manufacturer, Angang Steel Co.
Speaking to reporters in Hong Kong on Wednesday, Zhang Xiaogang said that the big three global miners actually cut exports to China during the talks. “That was a step they took as part of the negotiations,” he said.
The big three global miners – BHP Billiton, Rio Tinto and Vale - are trying to get Chinese miners to go from annual to quarterly contracts. Steelmakers in other parts of Asia, such as Korea and Japan, agreed quarterly prices from 1 April, however their Chinese counterparts – with the support of their government – are holding out for an annual benchmark deal.
Angang plans to increase capital spending by 19 percent to $1.4 billion this year, company secretary Fu Jihui said in Hong Kong. The company has enough capital to cover operations, and doesn’t plan to sell any more equity, Fu said. Orders and export demand for steel are improving this year, Vice Chairman Chen Ming said.
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.
South Korea’s government and the country’s steelmakers will hold talks in Tokyo with their Japanese counterparts about the sharp rise in iron ore prices. The Korea Iron & Steel Association, whose members include Posco and Hyundai Steel Co., will hold talks in Tokyo with its Japanese counterpart to form a consensus, South Korea’s Ministry of Knowledge Economy said today.
The ministry said officials and executives at the joint government-private sector gathering concurred that the 90 percent on-year hikes in iron ore and 55 percent gains in bituminous coal prices will increase steel product prices, which will then cause price rises in other industries.
A joint press release said that "a rise in steel prices will adversely affect autos, shipbuilding and industrial plant sectors that can hurt consumers and overall sales," adding that companies in both South Korea and Japan have agreed to work together to follow price increases being pursued by global miners Vale, Rio Tinto and BHP Billiton. The groups are also concerned about a move to shorter-term contracts.
Chinese and European steelmakers have also made it clear that they oppose the rise in prices.
The bi-lateral talks are part of an annual gathering between the two groups and the countries’ governments. Talk will also focus on cooperation against plans to combine BHP and Rio Tinto’s plans to combine iron-ore assets in Australia claiming that the venture may hinder competition.
Lee Seung-woo, head of the Ministry of Knowledge Economy's steel and chemical industry division, represented South Korea at the meeting, while the Japanese delegation was headed by Masaki Koito, head of steel industry division at the Ministry of International Trade and Industry.
Executives from the Nippon Steel Corporation and the Iron and Steel Institute of Japan also attended the meeting.
Global miner Rio Tinto Ltd has announced that it is to move away from annual iron ore pricing contracts and is now negotiating with its customers to supply on quarterly contracts.
Chief executive of iron ore Sam Walsh said in a statement on Friday that the move "is in line with our recent comments that benchmark pricing only works if it reflects market fundamentals, otherwise the system would need to change."
Mr Walsh said that negotiations were still taking place and no further guidance was possible.
The move brings to an end the 40-year system of annual benchmark contract prices between miners and steelmakers. At the end of March RT’s rivals, BHP Billiton and Vale both said they had come to agreements with Japanese and Korean steelmakers to supply iron ore based on quarterly contracts. At the same time they announced price rises of over 90% more than the 2009-10 contract prices.
The move to quarterly contracts for iron ore comes after a similar move by BHP to move to quarterly contracts for coking coal.
Meanwhile magnetite iron ore pellet producer Grange Resources Ltd said on Friday said that it was finalising a quarterly index-based pricing arrangements with its major shareholder and main customer, China's Jiangsu Shagang Group Co Ltd.
Grange said it had secured an interim price increase of 69 per cent for iron ore pellets and expected that the final average price it received in 2010 would be between 80 per cent and 120 per cent higher than 2009 prices.
Commenting on the arrangement Grange chief executive Russell Clark said "Once we have final agreement, the revenue from pellets sales after 1 April 2010 will be backdated to reflect the new arrangements."
Spot prices of Indian iron ore soared to $183.10 per tonne on Thursday in response to the China Iron and Steel Association’s call for a boycott of the big three global miners, Vale, Rio Tinto and BHP Billiton. CISA called the boycott after the big three sought a 90 per cent rate hike, moved to quarterly pricing and scrapped the annual iron ore benchmark system.
Spot prices of 63.5% Indian iron ore fines stood at $181.70-$183.10 per tonne on Thursday, up from $171 a tonne a week ago, before CISA called for a boycott of iron ore produced by the big three global miners.
Meanwhile Chinese media reports that the 19 major Chinese ports currently have stockpiles of 67.37 million tonnes of iron ore this week, down by155,000 tonnes from a week ago. Only Qingdao and Rizhao ports – the latter China’s main iron ore port – showed increases in their stockpile. Dalian Port had 2.02 million tons of iron ore in stock, a fall of 330,000 tons from last week, while Caofeidian Port in northern China's Hebei province had 3.45 million tons, down by 150,000 tonnes.
Australian miner, Atlas Iron, says it expects to achieve an increase in its iron ore of about 90 per cent in its iron ore prices compared to last year’s benchmark prices the company said in a statement on Wednesday. The company says this is in line with pricing outcomes achieved by the iron ore majors.
Atlas also said it is experiencing strong demand for its iron ore, both from existing and potential new customers.
The Perth-based iron ore company also said it aims to start mining at its Wodgina direct shipping ore project late in the second quarter of the 2010 calendar year and to export its first shipment from the project late in the third quarter or early in the fourth.
The upgrade of its Pardoo direct shipping ore project is now complete and it is aiming to ramp up production to 2.4 million tonnes a year from 1.2 million tonnes in the third quarter.
Atlas also expects its merger with Aurox Resources to go ahead. Documents will be despatched to Aurox shareholders in late-April to enable them to vote on the merger by late-May. The Aurox board have recommended acceptance of the bid.
BHP Billiton has won a 99.7 per cent price rise from its Asian iron ore customers for the April-June quarter.
The news came from the London-based commodity team at Macquarie Bank, which cited steel industry sources in Japan. BHP will charge $US120.08 a tonne for Pilbara fines iron ore which, the bank says, "represents a massive 99.7 per cent rise over 2009 Japanese fiscal year contracts".
However, taking into account current freight rates, the settlement would result in Australian iron ore landing at around $US131.50/tonne on a delivered Asia basis, a 22 per cent discount to current spot levels.
Macquarie understands that prices for BHP's lump iron ore were approximately $US135/tonne for the March-June quarter, 88 per cent above 2009 levels.
In March BHP said it had reached agreement with a significant number of Asian to move existing annual iron ore contracts onto quarterly pricing arrangements.
Industry experts in China have criticised the China Iron and Steel Association’s call for a boycott of iron ore produced by the big three global miners.
CISA has asked Chinese steel mills to concentrate on running down the stockpile of 75 million tonnes of iron ore sitting in the nation’s ports rather than buying from Rio Tinto, BHP Billiton and Vale. The call came in the wake of steelmakers in Japan and Korea agreeing quarterly pricing commencing 1 April and a price rise of over 90%.
However CISA’s call seems to have divided the industry.
"CISA sounds like a lobby representing Chinese steel mills. However, it does not run the business, and hence it has no idea of the real needs of the steel mills," one sales manager from a steelmaker in China’s Hebei province told the China Daily newspaper on condition of anonymity.
"If we don't purchase iron ore for two months, it will have a negative impact on our output. We will talk with miners privately to secure ore supplies," he said.
Analysts say that if steelmakers don’t buy from the global miners for two months, the surge in demand at the end of that period will lead to increased prices.
Li Xinchuang, president of the China Metallurgical Industry Planning & Research Institute, said that the country should enhance exploration of domestic iron ore mines and increase investments in overseas mining resources to have a bigger say in the pricing negotiations.
"The situation can be quite different if China controls 50 percent of the global iron ore imports," he said.
Meanwhile, Australian trade minister Simon Crean has said the boycott is "doomed to fail."
``What they have to understand is this is the market at work,'' he told reporters in Canberra on Tuesday.
``They can't influence the market by centrally-controlled edicts. That will be bound to fail.
``If their demand is as strong as it is, and they're having to compete with other countries who are competing for the same resources, then the price effect in the current circumstances is the natural consequence.''
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.
Indian state-owned iron ore miner, the National Mineral Development Corporation (NMDC), has hinted at a rise of between 34% and 56% in its base prices. The company has also suggested that prices will also rise substantially later on and any rise will be back-dated to 1 April. The company raised its prices by 16% in January.
NMDC supplies iron ore to India’s domestic steel producers that do not have their own captive iron ore supply.
Natural pellets will rise from Rs3258 to Rs5100 a tonne – a rise of 56% - but with an additional rise to come later, the increase is more likely to be in the order of around 75%. For iron ore fines the price will increase 34% to Rs2600 a tonne, and for calibrated lump ore, the price will rise 46% to Rs3800 a tonne.
NMDC’s long-term domestic pricing is based on recommendations by the Indian government’s Ganesan committee which has been used since 2006-07. The committee recommended that domestic prices should be calculated by taking into consideration the percentage change accepted by Japanese steel mills for NMDC’s product coupled with exchange variations on six-monthly forward rates on a yearly basis. As NMDC has yet to agree a contract with Japanese steel mills, the domestic increase is provisional. There are fears amongst Indian steelmakers that the domestic increase could increase by as much as 90% as Japanese steelmakers have accepted a price increase for the April-June quarter of 92%, to $106 a tonne.
Iron Ore Junior Will Use Benchmark As Reference Price
Gindalbie Metals Ltd has said that the price it sells its iron ore to its Chinese joint-venture partner, will depend on the prices achieved by the industry’s big three global miners.
Speaking to Australia’s Sky News Business Channel on Sunday, chief executive Garret Dixon said "The best thing that we can do is to use their reference price, the prices they determine, as a reference price for our project. What we do as a small guy I suppose is ride on the back of the negotiations of the big guys out in the market. That's the way we have to play it.”
Production at the company’s Karara mine will be shipped to Chinese steelmaker Ansteel commencing next year from the port of Geraldton, 250 miles north of Perth in Western Australia. The two companies signed an agreement this week that could deliver nearly 900 million tonnes of iron ore over three decades once the Karara operation in Western Australia’s Mid West iron belt is running at full capacity in full swing.
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.
