Sunday 19 April 2009

China Expect Iron Ore Prices to Drop 40%

As the annual iron ore negotiation cranks up, it seems Japan, China, and South Korea steelmakers are expecting a 30%, 40%, even a 50% price cut respectively from the world’s three biggest iron ore miners.

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Guanyu said...

China Expect Iron Ore Prices to Drop 40%

CSC staff, Shanghai
17 April 2009

As the annual iron ore negotiation cranks up, it seems Japan, China, and South Korea steelmakers are expecting a 30%, 40%, even a 50% price cut respectively from the world’s three biggest iron ore miners.

Japanese media have reported that Japanese steelmakers have agreed to a 30% price cut with three iron giants, BHP Billiton and Rio Tinto of Australia, and Vale of Brazil.

According to Japanese media, four Japanese steel giants have recently largely cut production and expect a 40% cut in the price of ore. Rio will only agree to a 20% cut. Failure to reach an early agreement will affect price negotiations between steel companies and its major customers such as auto or home appliances companies. The ore miners believe economic growth in emerging countries spells continuously growing demand for energy and mining resources. Japanese steel companies are likely to soon reach a price cut of around 30% with mining giants.

“This is not what I have learned,” said Luo Bingsheng, executive vice chairman of China Iron & Steel Association. CISA Secretary General Shan Shanghua earlier declared that since steel prices had returned to 1994 levels, so too should the iron ore price, and this year’s iron ore price should be cut by at least 40%.

Although iron ore demand in other countries is slumping, in China demand is apparently increasing. In the first quarter of this year, China imported 131 million tons, up 18.8%, year on year. In March alone China imported 52.08 million tons, 46.2% over the same month last year and a record high.

Vale’s iron ore production totaled 301.7 million tons in 2008, and 40.9% of the company’s income was from Asian markets. China, buyer of 17.4% of its total iron ore exports, is its biggest overseas market. The three mining giants sold 140 million tons of iron ore to China in the first quarter, up 32%, year on year, while their total global sales in the same period was 177 million tons. Of that total, 40 million tons were imported from Brazil, forcing other counties to cut their iron ore exports to China by 53% to 35 million tons.

Compared with the Chinese, the European, Japanese, and South Korean steelmakers are feeling a harder pinch. After cutting production by 45% in the fourth quarter of last year and first quarter of this year, ArcelorMittal, the world’s largest steel company, declared a further 45% cut for the second quarter. Steel companies in Japan and South Korea face similar difficulties.

As for a price cut that is reasonable for the miners, Hu Kai, analyst for emetal.com, said in a February report that due to AUD’s drastic depreciation against USD, which is the currency used for iron ore transactions, according to his calculation, a 30% price cut in USD still equaled a 3% price hike in AUD. The AUD has appreciated since then.

However, due to decline in demand, the current iron ore spot price is still lower than the long-term contract price, even with the 30% cut.

South Korea-based Posco demanded a 50% price cut last week. “Mining companies are stalling at a 20% cut, nowhere near our position. We think iron ore price should be cut by at least 50% on last year’s basis, and we require negotiations to be concluded in April,” said Mr. Kim, Posco’s vice president in charge of sourcing.

Metinvest’s steel industry analyst Niu Wei thinks that as the conventional negotiation mechanism was broken last year, agreements will be difficult to reach this year.