18 Aug 2010 15:54

ENRC discussing alternative pricing mechanism with Russia's MMK

MOSCOW. Aug 18 (Interfax) - Kazakh miner Eurasian Natural Resources Corp (ENRC) is discussing an alternative pricing mechanism for a long-term iron ore contract with Russia's Magnitogorsk Iron & Steel Works (MMK) , ENRC said in an earnings report for H1 2010.

ENRC has a contract with MMK to supply up to 15 million tonnes per annum of saleable iron ore concentrate and pellets. MMK had an option at March 31, 2010 to reduce volumes of iron ore purchased from 15 million tonnes; this option was not exercised. The contract expires on March 31, 2017. The contract states that pricing is determined by reference to published price indices for iron ore concentrates and pellet. With the demise of the annual benchmark pricing system, the pricing structure is now under discussion with MMK. The contract has a provision for arbitration should an agreement not be reached, ENRC said.

MMK declined to comment.

ENRC said the improved condition of the Russian steel industry in 2010 enabled it to sell substantially higher volumes to its principal customer, MMK.

It said sales to China, which doubled in 2009 versus 2008 to make up some of the shortfall in ENRC's sales to MMK, remained broadly steady in H1 2010 in comparison to H1 2009. The greatest opportunity for ENRC to develop sales in the future is the ongoing industrialisation of ENRC's traditional markets in North West China, along with the access that will in time be offered by the new China Gateway rail link. The market for higher value added products is another opportunity open to the Group, hence the project to build HBI capacity.

The move away from the annual benchmark pricing system means that an alternative mechanism is required for the MMK contract and this is currently under discussion. Overall China's continued increase in steel production and its huge demand for iron ore will keep the market tight and support strong pricing in the medium term, ENRC said.

ENRC said the global steel market continued its recovery in H1 2010 with total steel production totalling 708 million tonnes and China accounting for approximately 45% of the total. A very strong Q1 2010 was offset by a slowdown in Q2 as a result of Chinese fiscal tightening and the effect of the withdrawal of stimulus packages elsewhere in the world.

ENRC said a marked change in the fortune of the Russian steel industry was also evident with strong production in Q1 being replaced by shutdowns in Q2. During this time MMK again were unable to take their full contracted volumes, but Chinese customers were willing recipients of extra volumes. Any slowdown has the added effect of reducing the relative demand for pellet as a focus on throughput is replaced by an emphasis on low cost raw materials.

The effect of the slowdown was felt in the spot iron ore prices as the market fell from a peak of $186 per tonne in April to a low of $134 per tonne at the end of June. The market fell further to a low of $112 in the middle of July. However optimism returned at the start of Q3 and the price recovered to $140 per tonne at the end of July. Subsequently Q2 2010 heralded the demise of the annual benchmarking system as the major producers attempt to achieve realised market prices for the product. The system is likely to be replaced by a spot pricing mechanism as published in Platts Steel Markets. However, the system still has some way to go before it is fully transparent and widely recognised. In the meantime ENRC has also moved to a shorter term pricing mechanism with MMK and are still discussing how a new pricing mechanism for the long term contract will be adopted, ENRC said.

MMK stopped a blast furnace for maintenance in May. The company told Interfax at the time that it would make sense to smelt more steel at electric furnaces given the ratio of feedstock prices to capacity utilization.

MMK provides 30% of its own iron ore and buys the rest under the ten-year contract with ENRC. MMK produced 9.6 million tonnes of steel in 2009, making it Russia's fourth biggest producer behind Severstal , Evraz Group and Novolipetsk Steel (NLMK) .