china's iron ore projects under construction, page-3

Chinese iron ore contracts in jeopardy

Cath Hart | December 08, 2008
Article from: The Australian

LUCRATIVE iron ore contracts with China held by BHP Billiton and Rio Tinto are potentially under threat following reports that Chinese steel companies want to terminate 2008 agreements three months earlier than scheduled.

In an escalation of tension ahead of 2009 iron ore price negotiations, the China Iron and Steel Association reportedly wants 2009 iron ore contracts to begin in January, instead of April, a senior official from the association told Reuters from the sidelines of an industry conference in Shanghai.

"We are negotiating the plan, as Chinese companies take the calendar year as their fiscal year," the lobby group's executive reportedly said.

The comments by the official followed reports in the London-based Steel Business Briefing report that an "unnamed source close to CISA" said the association wanted to terminate its 2008 contracts with BHP and Rio three months earlier.

Such a move would benefit China's steel companies, which have acquiesced to massive increases in the costs of iron ore during recent contract price negotiations and will put more pressure on producers BHP and debt-laden Rio as commodity prices continue to tumble.

Most of Rio and BHP's iron ore contracts start on April 1, the start of the Japanese financial year, reflecting the historical relationship between the producers and Japan.

During negotiations with China earlier this year, BHP and Rio secured a weighted average increase of 86 per cent with Chinese steelmaker Baosteel for iron ore benchmark contract prices. Analysts estimated the outcome would add $US900 million ($1.4 billion) to Rio's net profit and $US500 million to BHP's this financial year.

China has said that in the coming round of negotiations it will seek unified iron ore prices from Brazil, Australia and India for the 2009 contract benchmark.

The negotiations are currently only in their preliminary stages, but have started as rumours begin to circulate that Chinese mills can't afford shipments in the first quarter of 2009 under the 2008 benchmark prices.

Spot iron ores prices have recently slipped below annual contract prices and analysts are downgrading price forecasts for 2009 contracts as demand wanes.

The brewing iron ore price war escalated as Treasurer Wayne Swan and Trade Minister Simon Crean left for Beijing on Saturday for talks aimed at increasing trade and investment.

Mr Swan and Mr Crean will meet officials including Zhang Ping, head of China's National Development and Reform Commission, and Commerce Minister Chen Deming.

China was Australia's largest trade partner last year and the two nations clocked up $58billion worth of two-way trade in goods and services that year.

But recent falls in China's growth rate have fuelled fears that the nation may not be the West's salvation from the worsening effects of the global credit crisis.

China's economic growth has dropped sharply to its slowest pace in five years, registering just 9 per cent in the third quarter, down from nearly 12 per cent last year.

A CISA official told Xinhua news agency 42 of 71 large and medium-sized steelmakers suffered losses in October.

The financial crisis has already begun to take a toll on iron ore producers, with BHP scrapping its $135 billion takeover bid for Rio. Brazil's Vale and Rio have also curtailed iron ore production as customers delay shipments and last month Fortescue brought forward a planned shutdown of its Pilbara operations.

Both BHP and Rio refused to comment on the contract and price negotiations yesterday.