18 Sep 2009 09:13

China unfazed by prospect of zero long-term iron ore contracts with overseas miners in 2010

By Ginger Ding

Shanghai. September 18. INTERFAX-CHINA - Chinese steel mills are unconcerned by the prospect that they may not lock in long-term iron ore contracts with the world's top three iron ore miners, namely Vale, Rio Tinto and BHP Billiton, in 2010, as the country has already nearly made it through a whole contract year without doing so, industry insiders told Interfax on Sept. 17.

Annual long-term iron ore price talks typically start in October each year. Chinese steel mills, which did not sign contracts with the top three miners in 2009, are currently paying for long-term deliveries based on provisional prices and have increased spot iron ore purchases.

"The chances are high that China will face another contract year without long-term iron ore price agreements with the top three miners. If that is the case, steel mills will be undeterred and can source imported iron ore for production from the spot market," Jia Liangqun, a senior industry analyst with Mysteel Information, told Interfax on Sept. 17.

According to Jia, spot prices would not be too volatile because if China, the world's largest iron ore importer, does not sign long-term iron ore contracts with the three miners, the latter would have little choice but to sell their huge iron ore output on the Chinese spot market at acceptable prices.

"The coming negotiations for 2010 will be even more difficult for China, as the pricing system has broken down. There could be a silver lining if China fails again to sign long-term contracts because the breakaway from the traditional pricing system may actually help China's bargaining position and bolster its influence over prices in the long run," another industry analyst, who asked to remain anonymous, said.

"China did settle on a bigger long-term price reduction on 2008 prices of 35 percent in 2009 with Fortescue Metals Group Ltd., the third-largest iron ore miner in Australia, after Rio Tinto and BHP Billiton. If, at the upcoming 2010 negotiations, terms offered by the top three miners are unacceptable, it is possible that China will first settle a 2010 iron ore price with FMG," Wang Sujuan, an industry analyst with Mysteel, said.

"Increasing investment by Chinese companies in overseas iron ore mines will benefit Chinese steel mills in the long term when those junior mines come online, but that may take a number of years," Wang said.

However, Zhang Bingzheng, deputy director of the General Administration of Customs' department of statistics, told Interfax that he expects that China will still negotiate long-term iron ore prices with the world's top three miners, as the absence of long-term prices may negatively impact domestic steel mills that are dependent on the huge volumes of imported iron ore, and stable raw material prices are of the utmost importance.

Zhang said that if the world's economies recover in 2010 as expected, global demand for steel and therefore iron ore will step up, which would support a long-term iron ore price increase of around 20 percent or higher from 2009's price agreement between Rio Tinto and BHP Billiton and Japanese and South Korean steel mills.

The spot price of Australian iron ore, grading 58 percent, at Chinese ports stood around $90.08 per ton on Sept. 18, 37.82 percent higher than the 2009 long-term price between the Australian miners and non-Chinese, Asian steel mills.