Below article stated that China is using 20 million tonnes per month so that the reported 300million tonne stockpile would be exhausted in 6 months. I suspect the stockpile is to iron out fluctuations in supplies. That is they will need to continue importing as is obvious with reports of pickups in the world economy.
BEIJING/SYDNEY (Reuters) -
Upstart Australian miner Fortescue Metals Group (FMG.AX: Quote) broke ranks with bigger rivals to agree a slightly cheaper iron ore price with Chinese steel mills in exchange for up to US$6 billion in funding, giving Beijing's beleaguered industry group a much-needed win.
But analysts said it was unlikely that the surprise deal to sell ore to China at 35% less than last year's price, touted as the new "reference" for price negotiations with the top three suppliers, would coax compromise from big miners who have stuck to the earlier-agreed 33% cut benchmark.
At stake in fraught negotiations that have dragged far beyond their June 30 deadline are billions of dollars in revenue for Rio Tinto (RIO.AX: Quote), BHP Billiton (BHP.AX: Quote) and Brazil's Vale (VALE5.SA: Quote), as well as the core cost component for Chinese mills that now make just about half of the world's steel.
"Chinese iron ore price talks have achieved an important and periodical success, but are not at all finished," CISA Vice-Chairman Liu Zhenjiang told reporters. Rio Tinto, the world's No. 2 supplier, said the Fortescue deal was not relevant to its pricing for this year.
Liu said the price -- effectively 3% lower than the benchmark that Rio set with Japanese and South Korean mills in May -- was reasonable and benefited all parties.
While still significantly higher than the 40 to 45% cut which the China Iron & Steel Association (CISA) had hoped to win when negotiations began nearly a year ago, the deal will bring a reprieve for CISA's Secretary General Shan Shanghua, who had staked the body's reputation on winning a better deal.
And while it will allow China to claim a small victory, analysts said the agreement was more of a coup for Fortescue, which unlike other Australian mills sells its ore only to China, is part-owned by a Chinese mill and will now turn to China to raise the financing it desparately needs to expand.
The deal is conditional on the completion of US$5.5 billion to US$6 billion in Chinese financing by September 30, Fortescue said. It also said it was seeking advisers for a Shanghai listing and would get "priority" in any annual 2010 price negotiations.
Sovereign wealth fund China Investment Corp is in advanced talks over a US$1 billion-plus convertible bond with Fortescue, sources told Reuters last week.
"Fortescue are trying to be the good guys for the Chinese. They are the new kid in town and want to secure relationships with the big consumers," said Mark Pervan, senior commodities analyst at ANZ. "They are in ramp-up mode, so they want the cash flow."
DISCOUNT TO RIO
Fortescue agreed to supply iron ore fines at US$0.94 per dry metric tonne unit and iron ore lumps at US$1 per dry metric tonne unit for the second half of 2009. That compares to a US$0.97 a tonne benchmark that Rio set for its fines sales in May.
Shan said the agreed prices include a 35.02% drop on year for fines, and a 50.42 percent drop on year for lumps, besting the 33 percent and 44 percent declines that major Asian mills -- and some Chinese mills -- have signed with BHP and Rio.
The deal, for 20 million tonnes of ore in the rest of 2009, will cover only a fraction of China's iron ore imports, which are running at more than 50 million tonnes a month.
But Fortescue is aiming to increase output to 95 million tonnes next year, according to CISA -- nearly half as much as world No. 2 miner Rio Tinto expects this year -- aiding its campaign to break into the iron ore market.
"By sticking to our own strategy, we're not a pawn in anyone's game," Fortescue Chief Executive Andrew Forrest told reporters on a call after the announcement.
Fortescue signed the pact with CISA and with Baosteel, China's top steel mill, which had led annual pricing talks until CISA took over this year.
Shan said though CISA was the organiser of the negotiations, Baosteel was the real representative for the mills, suggesting he may be backing away from the leading role.
By agreeing on prices only for the second of the year, both sides left themselves open for an improvement should market conditions change, and also put another crack in the 40-year-old benchmark pricing system.
Shan said next year's conditions would determine whether China continued to negotiate on a half-year basis.
STALEMATE
The deal will allow CISA to point to a success as its talks with the big firms appear to have reached stalemate, mired in a diplomatic row over the arrest of four Rio employees suspected of stealing commercial secrets and bribery.
CISA will negotiate with the three miners using the Fortescue prices as a reference, Shan said. He said Fortescue had promised to supply to all Chinese clients at "one price".
But analysts were doubtful it would make much progress, with spot market prices having surged 50% since the initial 33% deal and a number of Chinese steel mills having already broken away from CISA to agree that price on their own.
"I don't think (the big miners) will take any notice because there seems to be plenty of evidence that Chinese mills are signing contracts on what you might call the Asian benchmark," said Steel Business Briefing's Paul Bartholomew.
CISA has long wanted Chinese importers to agree to stick to one price, rather than driving up local prices by re-selling to each other, but has so far failed to win any agreement.
FMG has been wooing Chinese steel makers and investors, marketing itself as an alternative supplier to its two much larger Australian rivals.
CISA says the three top miners have too much pricing power, but the rapid growth of the Chinese steel industry means the iron ore market is still a sellers market. (Writing by Lucy Hornby and Tom Miles; Additional reporting by Nicholas Trevethan in Singapore, David Stanway in Beijing; Editing by Jonathan Leff and Clarence Fernandez)
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