China's steel mills may push Rio Tinto and BHP Billiton for an early settlement of 2009 iron ore contract prices in a move set to take advantage of weaker global demand for the raw material, Westpac has warned.
Contract prices for iron ore - Australia's second-biggest commodity export after coking coal - are widely expected to fall this year. Westpac senior economist Justin Smirk said on Thursday that Chinese steel giant Baosteel would seek to conclude the annual talks before Beijing's $US586 billion ($A836 billion) fiscal stimulus package takes effect to secure the lowest possible prices.
However he added that the world's three biggest iron ore miners, Rio, BHP and Vale are likely respond by trying to string out negotiations for as long as possible in the hope that global iron demand will improve.
"The Chinese are keen to settle earlier, but the end result is probably that the negotiations will be protracted," Mr Smirk told BusinessDaily.
The influential China Iron & Steel Association was last month reportedly lobbying to change the start date for iron ore contracts to January 1, three months earlier than the traditional starting date on April 1.
CISA also demanded that iron ore contract prices be reduced by 82 per cent to reflect the fact that global steel demand has fallen to 1994 levels.
Westpac's Mr Smirk forecast a smaller, though nevertheless significant, decline of around 30 per cent in prices this year. That compares with 2008 iron ore contract prices of about $US90 a tonne.
He added that Chinese iron ore prices were being driven by domestic rather than international developments, with prices in the world's fourth largest economy remaining firm despite a deteriorating global outlook in the last three months of 2008.
The annual talks between Rio, BHP and Vale and Asia's major steel mills are closely guarded, but the two sides are already believed to have taken their places at the deal table.
In 2008, Vale settled its contract terms with Baosteel in February, but Rio and BHP remained locked in negotiations mid-year as they pushed for contract prices to reflect the cheaper cost of shipping iron ore from Australia to China compared with Brazil.
Source: Melbourne Herald Sun
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