China's attempts to force a bigger cut in iron ore prices appear to have failed, in another blow to Beijing, which is already reeling after the collapse of Chinalco's $US19.5 billion ($24bn) alliance with Rio Tinto.
There are signs Chinese steelmakers have buckled in iron ore price negotiations and will this week fall in line with the average 37 per cent price cut agreed by Japanese and Korean steel mills.
Despite the China Iron & Steel Association (CISA) previously declaring it would not accept a 33 per cent cut in benchmark iron ore fines agreed to by other Asian consumers, industry reports say it will do so this week.
According to newsletter Steel Business Briefing, China's biggest steelmaker, Baosteel, and CISA have internally agreed to accept a similar iron ore price cut to Japan's, bringing prices of Australian ore down to $US61 a tonne at the export port.
China has been doubly burned by Rio's spurning of the Chinalco plan in favour of a $US15.2bn rights issue and a merger of Rio's and BHP's vast West Australian iron ore operations.
As well as having increased influence over iron ore supply through the Rio deal dashed, China, the world's biggest iron ore buyer, now faces the unappetising prospect of two of its three main suppliers joining forces.
There is speculation that the jilted Chinalco, still Rio's biggest shareholder, with a 9 per cent stake, has privately rejected chief executive Tom Albanese's hopes of a future close relationship.
Instead, it is now said to be joining other big shareholders in calling for heads to roll at Rio.
Sources close to Chinalco said the state-owned aluminium giant would push for management and board changes and any hopes for a close relationship were "wishful thinking", London's Sunday Times newspaper reported.
Focus is now also on what Chinalco will do with its big stake in Rio.
Chinalco is still mulling its options but it is expected to take up its entitlement under Rio's heavily discounted rights issue to average down its purchase price of Rio shares.
Its $US14bn share raid on Rio in February last year was made near the top of the market and was then China's biggest foreign acquisition -- concerned that if BHP's takeover plans for Rio succeeded it would force up iron ore prices.
Despite official concerns in Beijing at the $US5.8bn merger of BHP's and Rio's Pilbara operations, ANZ analyst Mark Pervan said it would be hard for Chinese mills to hold out for a bigger price cut and it would not be surprising if they fell into line with the benchmark set by Japanese and Korean mills late last month.
However, not everybody was convinced Chinese mills, which have been holding out for a price cut of 40 per cent or more for iron ore fines, would accept the same terms.
"The chance of China settling at the same rate as Japan is small -- I'd bet my house against it," said an iron ore trader in Hong Kong.
CISA recently said it had a new plan for iron ore negotiations but still was not prepared to accept the Japanese settlement.
It did not say what the plan was.
Some sources in China said Rio's abandonment of Chinalco could hurt Australian iron ore miners.
"This unexpected change has made China's iron ore negotiation more difficult," an editorial in China's Jiefang Daily said.
"People in the iron and steel industry have suggested that there will be cold treatment to Australian miners, and focus on talks with Brazilian miners," it said.
Mr Pervan said China might be right to be concerned about the influence a combined BHP and Rio iron ore business would have on supply.
"Although both have been fairly rational players, to date they have been keeping iron ore supply pretty tight," he said.
"They are likely to do that even more so with better control over the supply response."
However, Mr Pervan said the alternative argument could be made that savings from merging the pair's operations in WA's Pilbara region could encourage expansion.
Rio and BHP's combined iron ore operations will top Brazil's Vale as the world's biggest iron ore supplier.
The three control 75 per cent of the world's seaborne iron ore trade.
Rio and BHP are hoping that a deal to separately market the iron ore will be enough to satisfy EU competition watchdog the European Commission.
The EC was not prepared to pass BHP's failed $135bn bid for Rio last year without conditions.
BHP chief executive Marius Kloppers said the main issue the EC had with the Rio takeover was that it would mean fewer parties would set the benchmark price.
He said this would not be the case under the proposed alliance.
Despite BHP's and Rio's confidence they had done enough to get the deal past regulators, some analysts were wary.
Tobias Woerner, an analyst at MF Global Securities, said regulatory hurdles were a major risk.
The European federation of steelmakers or Eurofer, has said it is against the deal, while the World Steel Association, representing 85 per cent of the world's steel production, said the deal should be blocked in its present form.
Source: The Australian
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