China and iron ore firms fail to meet deadline

  @ibtimes on June 30 2009 12:15 PM

Price negotiations go beyond the Tuesday deadline as the world's biggest iron ore miners and Chinese steel makers are still in talks for the annual supply deal.

China is still discussing the annual iron ore price with major iron ore firms, said Xianwen Chen, director of the market operations department of the China Iron and Steel Association (CISA), according to Chinese official news agency Xinhua.

The CISA heads the talks on behalf of China's steel-makers.

We are officially in discussions still, Gervase Greene, spokesman of Rio Tinto, told Xinhua late Monday.

Chen said that the CISA still insisted that the iron ore prices should fall back to 2007 levels, which meant a price cut of more than 40% in the annual contracts of iron ore.

The CISA said in a statement on May 31 that China's steel companies would refuse to accept the 33% price cut reached between Rio Tinto and Japan's Nippon Steel Corp.

The Japanese and South Korean mills can afford a higher price for iron ore imports than Chinese players as many of them own shares in some Australian miners and can still make profit with the 33% price cut this year.

The same price cut as that of Japan would lead to overall losses for Chinese steel companies, the CISA said in the statement.

The Chinese side was working to seek a cut of more than 40%.

Both Chen and Greene refused to comment further on how the talks were progressing.

If the CISA failed to reach a supply agreement with any of the three biggest mining companies -- Vale of Brazil, Rio Tinto and BHP Billiton -- Chinese steel makers may have to turn to the spot market for supplies.

Spot iron ore prices rose to the highest in four months and above the annual benchmark level agreed between the three miners and big steel makers elsewhere in Asia.

Jiesheng Zeng, analyst with Mysteel.com, added sea freight is another key factor affecting the costs of mills because the price agreed between steel mills and suppliers is usually FOB price.

He explained that most Chinese mills lack long-term shipment agreements and are hence exposed to the sea freight price ups-and-downs.

Since the benchmark price was inked by Japanese and South Korean mills last month, sea freight from Brazil and Australia to Chinese ports have increased $24 and $5 per ton respectively.

Its influence on steel mills' costs is larger than the around $6 gap between a 40% and 33% price cut, Zeng said.

He suggested that Chinese mills must learn from their Japanese rivals who are largely reliant on long-term iron ore supplies but sign annual shipment contracts for them at the same time.

Right now, China is backed up by a large number of iron ore stocks. Data from Lange Iron and Steel website indicates the iron ore inventory in China is over 100 million tons by the end of May. These stocks can be used to support steel industry until August, said a source. But we cannot predict what will happen after August since the market is changing. he added.

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