Proactive investors

Additional information

Additional	Information
Market:	ASX 200
Sector:	Aerospace
Epic:	ASX200
News:	Latest news
Web Site:	Australia Market Wrap
Other Articles:	02-09-201001-09-201030-08-2010

Global iron ore price negotiations - news and analysis

by Metalsplace.com

This time of year, the news flow from the global iron ore market doesn't get much better. The posturing. The official statements. The anonymous comments and the attributable ones. In an attempt to sort through the latest developments, consider the recent story lines--and backdrops--swirling around the high-level annual contract pricing negotiations:

-- The Big Three global iron ore miners--Brazil's Vale and Anglo-Australians BHP Billiton and Rio Tinto--are seemingly making money hand-over-fist.

-- On the other side, Chinese steel mills--which produce more than a third of the world's steel, making the country the biggest consumer of iron on the planet--are lamenting leaner profits for 2009, and even losses for several of them.

-- Miners were reportedly this close to a deal for a 40% provisional price hike in 2010-2011 annual contract pricing of iron ore--and some think an 80% increase is possible compared to 2009-2010.

-- Four Rio Tinto executives, including Stern Hu--last year's lead negotiator for Rio Tinto in the talks--were formally charged in a Chinese court with bribery and infringing trade secrets, according to China's Xinhua news. They had been arrested and detained since last summer.

-- The China Iron and Steel Association (CISA) is openly criticizing the media for irresponsibility--and some western analysts tend to agree.

-- Vale said Thursday it was open to spot-market trading, which it said now accounts for 50% of the seaborne trade.

MONEY TALKS, AND MINERS ASK FOR 40% PROVISIONAL INCREASE

Vale reported net income late Wednesday of $5.35 billion for 2009, compared with $13.2 billion the previous year. Rio Tinto reported a $4.87 billion net profit for last year, up 33% on 2008, attributing the jump torecord iron ore sales and a recovery in commodities prices. BHP Billiton said Tuesday its profit from operations during the half-year that ended December 31, 2009, rose 26.2% to $9.12 billion from $7.22 billion a year earlier.

The China Iron and Steel Association said Wednesday that the country's 68 largest steel mills posted combined net profits of Yuan 55.4 billion (about $8.1 billion). The net incomes of just Vale and Rio Tinto combined amounted to $10.2 billion last year. Eight of the 68 mills in China posted losses in 2009.

Miners were reportedly nearing a deal for a 40% "provisional" price hike in the 2010-2011 talks. According to a mining executive familiar with the annual negotiations, the 40% price increase was discussed with the five biggest Chinese steel mills individually and an agreement was thought to have

been reached, the source told Platts exclusively in a meeting earlier this week. When discussed collectively and within the formal framework of the negotiations, however, the mills became reluctant.

The same mining company executive pointed out that seeking a 40% hike was indeed only a provisional arrangement and that if there were an annual price agreement at all, it would have to be a price hike on the order of 80% for the 2010-2011 delivery period.

Still, the mining executive was optimistic that the mills will agree to the 40% uplift in contract pricing within the next few weeks, particularly at those mills with contracts running January to December.

A 40% increase over the 2009-2010 benchmark price means Australian iron ore fines would be $1.358/dry metric ton unit, or $84/dry mt FOB Australia for 62% Fe. From Brazil, this would equate to a new price of $1.258/dmt unit, or $83/dmt FOB Ponta da Madeira for 66% Fe Carajas fines.

Such prices are still well below current spot prices, which Thursday were at $117/dmt FOB Australia and $98.43/dmt FOB Brazil for 62% Fe-content fines, according to Platts' assessments and freight netbacks. Nonetheless, a 40% hike would represent a return close to 2008-2009 benchmark pricing, the highest on record.

VALE DANGLES SPOT-MARKET SHIFT

Vale said Thursday it was open to spot-market trading, which it stated now accounts for 50% of the seaborne trade. In 2008, nearly all the company's iron ore sales to steelmakers in Europe and Asia were made using long-term contracts, said Jose Carlos Martins, executive director, ferrous minerals, at the Rio de Janeiro-based company, in a call with analysts Thursday.

"When the contract benchmark system broke down in the face of impasses over price renegotiations with China, the ships stopped showing up in our ports," Martins said. "We were forced to hire our own ships."

Whereas most of Vale's iron ore revenue came from cargoes sent off from Brazil FOB to pre-determined clients and with freight-costs paid, Vale must now ship ore to market on a CFR basis, and hope to recoup its costs from the final price paid for ore on the spot market, he explained.

"We aren't dogmatic about what terms we sell our ore," said Martins. "We are prepared to work with whatever the market decides is better ...benchmark system or spot basis." Martins said.

"You cannot keep such a huge difference between benchmark [and spot]," he added, explaining that the spot price of iron ore is currently twice that of the benchmark price. Martins appeared to give his consent to spot market pricing. "Spot price is the market price," he said.

 THE VIEW FROM AFAR: CHINESE MILLS HAVE FEW OTHER OPTIONS

China's major steel mills "have no place to go if they really want to play hardball with the Big Three suppliers," according to US-based analyst Charles Bradford of Affiliated Research Group.

"There is a huge amount of iron ore mined in China (2009 raw ore production exceeded 880 million metric tons) and imports were 627.8 million metric tons," Bradford wrote in a research report. "But the domestic ore is very low grade and it takes something like 2.2 mt to be the equivalent to 1 metric ton of imported ore."

Much of the Chinese ore needs to be blended with imported ore to be usable due to high silicon and alumina content, he said in a report issued Wednesday.

The Chinese steelmakers maintain "since they are the largest importers of iron ore, they should set the market," wrote Bradford.

However, the Chinese "government has recently passed new legislation making their antitrust rules extra-territorial," said Bradford, adding he does "not understand how they can fine global mining companies for antitrust violations without the cost being passed back to them."

He noted that in 2009, Japanese steelmakers settled first with their iron ore suppliers, "but the Chinese never ended up with an agreement and a lot paid a much higher spot price."

Like other observers, the long-time steel analyst reported that with iron ore negotiations heating up in Asia, "some of the producers are pushing for quarterly contracts rather than the annual benchmark deal."

The mining executive who spoke to Platts, in fact, criticized the traditional practice of negotiating iron ore contract prices on a yearly basis, suggesting that quarterly deals would be more suitable. He dismissed monthly price revisions as too volatile.

He said his company had begun using progressive pricing mechanisms, including linking contract prices to spot indices. "We are using an index for preliminary renegotiation with customers whenever spot prices diverge from the term benchmark," he said.

MEDIA 'IRRESPONSIBILITY' BECOMES AN ISSUE

Bradford, meanwhile, also expressed concern about "a lot of questionable reporting coming out of China," and he said that CISA "attacked their local media earlier [this week] for irresponsible reporting and warned journalists not to undermine negotiations this year."

Still, any settlement between Chinese mills and iron ore suppliers could come later, noted Chicago-based analyst Michelle Applebaum. In December, Vale announced plans to delay iron ore contract discussions until the first quarter because, she explained, surging iron ore spot prices, a volatile and uncertain demand environment, and a potential merger between the world's second and third largest iron ore suppliers would "likely complicate both the timing of discussions as well as the outcome."

"We think this was a smart move, as steel prices have soared in the last two months and current spot iron ore prices are double the average contract price for 2009," she wrote in a Wednesday report.

www.mineweb.com

Register here to be notified of Proactiveinvestors One2One Forums.