Iron ore miners have struck deals with Chinese steel mills to temporarily sell shipments at 40% discount to last year's term rates, aiming to secure volume even as the miners' biggest customer continues to demand a slash in prices.
The arrangement lets mills pay 60% of last year's contract price from Jan. 1, and settle the difference with the 2009-2010 term rate only after the benchmark price is set later this year, China Iron and Steel Association Secretary-General Shan Shanghua told Dow Jones Newswires late Thursday.
The move effectively dials benchmark ore prices back to 2007 levels.
"But the talks are not yet done," Shan said. "There will still be repayment of any outstanding amount when the rate is finalized and it doesn't mean they have accepted Jan. 1 as the contract's official start date."
The arrangement is a hint of what miners might be able to accept for a final term price, given its correlation to the spot market, analysts said. While Shan declined to elaborate on how far the world's top three miners - Companhia Vale do Rio Doce (RIO), Rio Tinto Plc (RTP) and BHP Billiton Ltd. (BHP) - have each implemented it, or on the progress of the price talks, most analysts said the move is now widespread, and in some cases have been in place as early as Jan. 1.
"From what I know, almost everyone involved has begun to do this," said Hu Kai, a steel analyst with metals consultancy and trading firm Umetal.com. "In the past, all benchmark rates have been crafted from spot rates," Hu said. "Now they're already using 2007 prices. I think it's very likely the price will eventually be a 40% cut from last year."
Zou Jian, an association director, told Dow Jones on Friday he knew Vale was implementing the arrangement.
The Chinese have consistently demanded the 2009-2010 term price be cut 30%-50% from last year's rate. Miners are holding out for an economic turnaround to press for negotiating advantage. But two of the miners have already signaled they would accept a price cut.
Shan's acknowledgment of the term discounts comes as ore suppliers increasingly turn to the spot market to gain sales in a souring steel market.
"Since December, a lot of compromises on the contract system have been put in place," said Henry Liu of Macquarie Research. "All three miners have been involved. Ultimately, its to their advantage to encourage the spot basis in order to gain sales."
With spot rates now running about 30% below 2008-2009 contract prices, including cost, freight and insurance, miners are scouring for volume.
Liu had observed in mid-March that even as Vale was stating it would continue to sell ore at benchmark prices, the miner was also bundling freight costs into ore sales to win market share.
Signs had surfaced earlier this month that miners were already moving to circumvent the contract system under economic duress.
Wuhan Iron and Steel Corp. Chairman Deng Qilin said at the sidelines of China's Congress that his mill now imports ore from BHP, Rio "and others" at spot prices, adding that mills had postponed contract shipments because prices were too high.
BHP had agreed to backdate this year's contract to Jan. 1 as a start date, instead of April 1, Maanshan Iron and Steel Co. Chairman Gu Jianguo told reporters earlier this month. The move which effectively lops three months off last year's lucrative terms. Rio and Vale had insisted on April 1, Gu said. But others said Vale was not as resolute on this point as purported.
"We hear that many Brazilian contracts with China have been converted into calendar-year contracts, from fiscal-year contracts beginning on 1 April, and 'provisional pricing' is being applied to January-March deals at a significant discount to current fiscal-year benchmarks," Macquarie said earlier in March.
Miners now hope an uptick in China's stimulus-led infrastructure spending would restore the sellers' advantage, or at least save them from a deep final cut.
"Certainly we need to recognize the fundamentals of the market and the market would show that there does need to be a downward adjustment," Sam Walsh, head of Rio's iron ore division, said this week. But "current spot prices don't verify a 50% reduction (in contract prices)," he said.
Vale has already offered the Chinese a 10% price cut, but was rejected because the cut was deemed too low, Zou Jian, a CISA director, told Dow Jones Newswires late last month.
Source: Dow Jones
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