Friday, April 10, 2009

Iron Ore Price Negotiations Still In Deadlock

It seems that the prolonged annual ore talks look set to drag on further as leading ore miners and Chinese mills continue to battle over the price cut margin. The China Iron and Steel Association does not accept the insufficient temporary 20% price cut offered by Rio Tinto Group, the world's second largest iron ore producer, and suggests Chinese steel makers pay only 40% discount to last year's term price for spot purchases until a better arrangement can be reached.

Mr Shan Shanghua secretary general of CISA told 21st Century Business Herald that "a 20% price drop is insufficient and does not reflect the market fundamentals." He also admits that some mills have agreed to Rio's proposal, but CISA is resolute in rejecting the offer.

According to CISA sources, meanwhile, both sides are placing heavy bets on future market developments. The ore talks are in a standoff and big three, and even Fortescue Metals Group, have rejected the 40% price cut demanded by Chinese mills. They are stepping up sales to the spot market, and have signed long-term supply contracts with several smaller mills. The ore mining titans are in no rush to wrap up deals at the moment on optimism surrounding China's crude steel output in the third quarter.

According to a report from IISI China's crude steel production already accounts for 48% of the world's total. The report also notes that China's crude steel output grew 2.4% to 41.52 million tonnes in January against a backdrop of halving steel production in other parts of the world. China imported a record 46.74 million tonnes of iron ore in February up 22.4% from the same time of last year.

However, Mr Shan described the rallying crude steel production as abnormal, adding that this does not represent the future market trend. He said that "Chinese mills do have a lot of choices apart from big three so far, we have invited FMG to join the benchmark ore talks. And we are in talks with ore miners from South Africa, India and the UK as well."

According to data from Macquarie Bank moreover, CISA has also hammered out a plan to substitute ore imports with domestic supply. So far, the fate of the proposal appears to be dismal. Chinese steel mills purchase ratio of domestic ore has fallen to 30% from previous 60% in last six months. As a result, 70% of Chinese iron ore miners have been forced to halt production.

In Inner Mongolia, crude iron ore output has slumped to 4000 tonnes compared with the full rate of 40,000 to 50,000 tonnes. In Shanxi sources suggest that only one ore mine is still producing.

Another pressing issue is the divided interests of various steel mills. A mill from west China complains that Baosteel, the leading negotiator for the ore talks, may not well represent the benefits of steelmakers across the country.

Source: Steel Guru/My Steel

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