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.
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.
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.
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.
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."
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.''
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.
China Will Have To Accept Near-Doubling Of Iron Ore Price
The chairman of one of China’s largest private steel company has described his country’s talks with the large iron ore miners as “pointless” in the wake of Japanese steel mills’ acceptance of rises of more than 90 per cent for the raw material.
Speaking in a telephone interview with Bloomberg, Shen Wenrong, chairman of Jiangsu Shagang said that Chinese steelmakers will have to accept the higher terms that Brazilian miner Vale SA has negotiated with Japanese steelmakers. Earlier this week Vale agreed a price of $106 per tonne, up 92 per cent over last year’s price, however unlike in previous years were prices were agreed for the period from April to March the current price will only run to the end of June and will be reviewed on a quarterly basis. Vale says that 97 per cent of its customers have now accepted quarterly price contracts.
“We have no options,” said Mr Shen, “Iron ore prices have gone too far. We have to accept it, although we can’t afford it.”
Meanwhile, the World Steel Association has asked regulators to probe what it described as an “oligopoly” among iron ore miners and the China Iron and Steel Association said it will hold an emergency meeting to discuss the issue. Chinese steelmakers are still discussing their price. He Wenbo of Baosteel, which is leading the talks on behalf of his industry, said yesterday “the negotiations are very difficult.” Some smaller Chinese steelmakers have reached private deals with the iron ore miners.
The knock-on effect of higher iron ore prices looks to have been felt already. Lakshmi Mittal of ArcelorMittal said this week that he expects steel prices to rise by 21 per cent this year as a result of increased raw material costs.
Chinese steelmakers say they have yet to agree to move to a short-term pricing mechanism for their iron ore supplies, despite steelmakers in other Asian countries agreeing to quarterly contracts.
Earlier this week, both BHP Billiton and Vale announced that major steelmakers in Japan and Korea had agreed to move to shorter-term contracts for the April to June quarter, based on prices in the sport market. Previously, prices were agreed on an annual basis from April to March each year. Prices to steelmakers in those countries have increased by almost 100% over 2009-10 price.
However, Luo Bingsheng, vice president of China Iron and Steel Association said that the long-standing tradition of annual contracts brings stability to the industry and that steelmakers in China would oppose any move to quarterly pricing. Meanwhile the Chinese government has backed its steelmakers with Jia Yinsong, an inspector from the Ministry of Industry and Information Technology's Raw Material Division, telling reporters at the China Iron Ore Conference this week: "We will certainly support long-term prices."
Mr Jia said that spot prices for iron ore will cause operational risks for companies, a risk for the industry as a whole and a credit risk.
Mr Jia added that he is concerned about the high inventories of Chinese iron and steel producers. The average profit margin for members of the China Iron and Steel Association was only 2.2 percent in 2009 and if iron ore prices double under the 2010 agreement this will push the entire industry into the red. Li Xin, head of the China Metallurgical Industrial Planning and Research Institute said that steelmakers would then be forced to pass price rises on to their customers, which will lead to higher costs for manufacturers of items such as automobile, consumer electronics and home appliances.
Commenting to the Chinese newspaper, People’s Daily, Mr Li said that Chinese steelmakers must break the stranglehold that the three largest iron-producers have on the industry. Chinese steel producers must go abroad, "If Chinese steel producers can control over 300 million tons of annual iron ore output abroad, the trend will be reversed," he said.
