Chinese steelmakers, the world’s biggest consumers of iron ore, will increase purchases in the spot market to pressure producers to give bigger discounts on contracts, the China Iron & Steel Association said.
A 20 percent discount offered by some producers is insufficient, Shan Shanghua, general secretary of the association, said in an interview, without giving further details. Cia Vale do Rio Doce, the largest supplier, offered a temporary 20 percent discount as 2009 prices are being negotiated.
Chinese mills, which bought $60.5 billion of iron ore last year, want producers Vale, BHP Billiton Ltd. and Rio Tinto Group to cut this year’s contract prices by as much as 50 percent to reflect falling demand for steel as the economy slows. Steelmakers typically agree to long-term contracts in order to secure stable supplies of iron ore at fixed prices.
“It’s part of the negotiation tactics,” said Hu Kai, a Shanghai-based analyst at Umetal Research Institute.
Spot iron ore at Chinese ports traded at $67 a ton on May 15, according to Metal Bulletin. That’s 26 percent cheaper than the benchmark price agreed for Australian iron ore last year. Traditionally, steelmakers pay contract prices at the previous year’s level until a new agreement is reached.
BHP Billiton, the world’s largest mining company, on April 22 said it had to sell 28 percent of its iron ore output at cheaper spot prices after customers deferred deliveries ahead of an expected decline in contract prices.
Vale, BHP and Rio supply about three-quarters of globally traded iron ore. China buys about half of the material.
“Buying from the spot market is a solution before the price talks conclude,” Shan said over the phone. “Members of the association have decided they aren’t going to obtain letters of credits to buy iron ore at a 20 percent discount. That’s an agreement by the steelmakers themselves.”
Benchmark prices this year may drop 40 percent because of lower demand for cars and building materials, Goldman Sachs JBWere Pty said in March.
Vale yesterday said 2009 price talks may be nearing a settlement in “coming weeks.”
China’s iron ore imports jumped 33 percent from a year earlier in April, setting a record for a third month, the customs office said last week.
Sinosteel Corp., RGL Group Co. and other Chinese traders, which accounted for half of the nation’s iron ore imports in February and March, boosted shipments by 30 percent in March from a year earlier, Shan said. The association is investigating whether the increase in April imports was because of stockpiling by traders, he said.
Ore stockpiled at ports reached 70 million tons in March as imports surged more than demand, creating congestion, the Ministry of Industry and Information Technology said April 28.
Source: Bloomberg
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