RioTinto, the world's second-largest producer of iron ore, is refusing to give in to steelmakers' demands for a benchmark price cut of more than 40 per cent below current spot prices for the 2009-10 contract year.
Rio executives told an analysts' briefing yesterday that the iron ore spot market had probably found a floor and any annual contract settlement needed to be at a premium to spot prices.
The company, Australia's biggest iron ore exporter, also said it has boosted its spot sales after a decision to compete with BHP Billiton in that market.
Briefing analysts in Sydney yesterday, Rio iron ore boss Sam Walsh suggested spot prices about 40 per cent below last year's contract price would not fall much lower because high-cost Chinese production had been displaced.
Rio and BHP are in contract negotiations for this year with Chinese steel mills. Talks are expected to drag on as producers wait for China's stimulus packages to boost steel demand.
Analysts are forecasting falls of 20-40 per cent from last year's record prices.
Macquarie analyst Brendan Harris said Mr Walsh indicated Rio's Pilbara operations were running at, or close to, their capacity of 200 million tonnes a year after being affected by heavy rains last quarter.
According to Mr Harris, Mr Walsh confirmed Rio was selling higher tonnages in the spot market after a decision to compete with a major producer that "acted to remove support for the benchmark price".
Merrill Lynch analyst Olivia Ker said Rio was bullish on Chinese iron ore demand, and was running at flat-out capacity.
"They also said they won't settle below spot prices," she said.
BHP has been leading a campaign to smash the annual contract system, although it is still involved in price talks.
Refusing to join Rio and Brazil's Vale in cutting production last year, BHP instead said it would sell on the spot market as long as it made a profit.
Last month, BHP revealed 28 per cent of its sales in the first nine months of the year were on spot markets as customers asked for deferrals of higher-priced contract deliveries.
Mr Walsh said China's campaign to settle below spot prices, if successful, would imperil the relevance of the benchmark system.
He also said Rio's plans to boost its Pilbara capacity by 320 million tonnes a year was at the advanced engineering and review stage and could be approved at short notice.
Source: The Australian
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