4 Feb 2010 06:47

Chinese steel mills may accept a 40 pct hike of iron ore price

Shanghai. February 4. INTERFAX-CHINA - Chinese steel mills are expected to relent to a 40 percent price hike at the long-term iron ore benchmark talks with global iron ore giant Rio Tinto in 2010, an analyst told Interfax on Feb. 3.

According to a 21st Century Business Herald report on Feb. 3, Rio Tinto has proposed to Japanese and South Korean steel mills a 40 percent hike of the iron ore benchmark price from the 2009 level. "I think the price hike is reasonable, as spot iron ore prices are now between 60 percent and 70 percent higher than the 2009 iron ore benchmark price reached between Japanese steel mills and Rio Tinto," Wei Zengmin, an analyst from Mysteel Information, told Interfax.

"In early 2009, mid global economic downturn, it was legitimate for Chinese steel mills to ask for a lower price. However, this year is a different story. It is fairly evident that the country's steel product demand and output will continue growing along with domestic economic growth in 2010, meaning prices of steelmaking raw materials would continue to grow through the year. Thus, it would be a bit unjust for China to bargain too aggressively with Rio," Wei said.

Meanwhile, he added that Chinese steel mills are eager to reach a long-term agreement as soon as possible, as there is some concern that Rio may be reluctant to agree on a long-term contract as a consequence of the failure to reach an accord with Chinese steel mills last year. "Long-term contracted iron ore will benefit Chinese steel mills by locking down production costs and ensuring raw material supplies," Wei said.

According to a report from the China Times on Feb. 1, representatives from Baoshan Iron and Steel Group (Baosteel Group) have gone to Singapore to commence iron ore benchmark price talks with Rio Tinto. "We expect that an agreement may be reached early this year, as it is fairly clear which direction the global economy will go in 2010," Wei said.

Chinese steel mills may also be adopting a different tack this year. A report from International Finance News on Jan. 19, said that Baosteel Group appointed a new chief iron ore negotiator, Wang Liqun, to replace Ding Shouhu, which could be seen as a move by China to start afresh and nail down an agreement at the 2010 iron ore price talks.

China's Ministry of Industry and Information Technology (MIIT) also recently added its voice to the ongoing debate, stating that the three global iron ore giants should consider establishing a long-term relationship with Chinese steel mills, and reach a reasonable price which could be accepted by both parties as soon as possible.

An employee, surnamed Mao, from Laiwu Iron and Steel Group, a major domestic steel mill, told Interfax that Chinese steel mills will need to take into consideration iron ore freight rates when deliberating a 40 percent price hike, as the iron ore benchmark prices are FOB (free on board).

The spot FOB (free on board) price of Indian iron ore, grading 63.5 percent, stands at between $104 and $105 per ton currently, compared to the long-term iron ore benchmark price of $62 per ton reached between Rio and Japanese steel mills for 2009.