Unlike some other metals iron ore is generally negotiated on one year terms; I used to favor this metal for that reason a year ago at this time thinking it would shield me from any commodity turn down (i.e. there is some visibility in terms of pricing). But in the student body left environment we live in there is no place to hide once commodities turn, as they are all treated the same.

Today we have news from Rio Tinto (RTP) on pricing, with a 33% haircut - considering the huge increases in prices last year that actually is not as bad as it sounds. In the past, once a general benchmark has been set in the first negotiation many other supply deals basically follow the same pricing. (that said last year in iron Vale struck first with a 70%ish increase, and then competitors got >90% increases shortly after) [Jun 23, 2008: Chinese Warned of Record Rise in Ore Price - 85 to 95%] This year it appears the Chinese are looking to press for even larger discounts than the Japanese, and considering how much they are dominating the purchase of every raw material in the world, they should be pressing suppliers hard. Should be interesting to see how this turns out.

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While iron is just a portion of the business for the big 3 mining giants: Rio Tinto, BHP Billiton (BHP), and Vale (VALE) - this is the predominant business line for a company like Cleveland Cliffs (CLF)... seeing the stock is up, I think the market agrees with my views that this price cut is not egregious all things considered. And still the 2nd highest pricing on record.

/Via Reuters

  • Rio Tinto Ltd (RTP) agreed to cut key iron ore prices to Japanese steelmakers by a third in this year's first contract deal, setting a benchmark that China will almost certainly reject after six years of surging prices. Rio , the world's second-largest producer, agreed to sell its Pilbara and Yandicoogina fine ores to Nippon Steel Corp JFE Holdings Inc and Sumitomo Metal Industries Ltd at 97 U.S. cents per dry metric tonne unit versus 144.66 cents last year, a reduction of 33 percent.
  • Those prices are still the second-highest on record in line with higher commodity prices globally, with raw material supplies having been strained by the industrialisation of China.
  • The long overdue settlement for contracts beginning from April was in line with levels that were rumoured last week, and will bring some relief to both miners and mills, which have been in deadlocked talks as demand for both steel and its main raw material collapses amid the worst recession since World War II.
  • But analysts said miners may find it tougher in negotiations with Chinese steelmakers like Baosteel, which have fiercely resisted anything less than a 40 to 50 percent reduction in prices that have roughly quadrupled since 2002 -- a position that may be hard to win as China's domestic ore output slumps.
  • They struck the deal with the Japanese first as they realise it will be tougher task with the Chinese, which is a much bigger market -- you could see a further 5-10 percent added to the cut.
  • For this year and next, supply of iron ore will outstrip demand and nothing bad will happen if the Chinese side doesn't sign anything, he said. Even if the miners agree a 50 percent cut I think the spot market price will still be lower this year.
  • If mills in China, which imported half of the world's traded iron ore last year, break the tradition of following the first deal, it will be yet another crack in the decades-old system of setting iron ore prices on the basis of annual negotiations, a process already under threat from growing spot market trade.
  • Historically you could say this is a done deal, when Rio strikes with Nippon, well everyone follows, but I get a feeling maybe the Chinese have got something else in store.
  • Brazilian miner Vale (VALE), the largest global iron ore producer, has allowed the Australian miners take the lead in this year's negotiations after having missed out on the peak of last year's pricing, settling an early deal with customers at a 71 percent rise.

Long BHP Billiton in fund; no personal position