******** Rio ore deals cause rift in China John Garnaut and Mathew Murphy June 3 2009
Molten steel is poured at the Shougang Steel company in Beijing. Photo: AP A SPLIT has occurred between China's steel industry and its representative body, the China Iron & Steel Association. The country's large steel mills are unhappy about the group's refusal to accept the iron ore price cut negotiated between Rio Tinto and other Asian customers. Pressure for China to accept the average iron ore price cut of 37 per cent for the year to April 2010 intensified yesterday as Rio announced that Taiwanese steel makers CSC and Dragon had accepted the "benchmark" prices. Last week Rio's Hamersley iron ore unit struck a deal with Japan's Nippon Steel and South Korea's Posco to provide iron ore fines at a 33 per cent discount and lump or pellets at a 44 per cent discount. Sources close to the secretive price negotiations say CISA will be forced either to change its mind or accept a new spot market world without benchmark contracts. "Privately, I believe Baosteel does not agree," said a source close to the negotiations, referring to CISA's statement on Monday that it would reject the benchmark settlement. CISA has insisted this year on commandeering the price talks. Baosteel remains in the negotiating room but is taking a subordinate role. "There are only two possible outcomes: either the benchmark or the spot market," said the source. "If they refuse to take the settled benchmark, the only way out is in the spot market, and that is not what they wanted in the first place." Analysts close to the talks say Rio will not agree to a discount for Chinese mills relative to customers in Japan and Korea. But they say it is still possible that CISA will fall into line and accept the Japanese settlement price after tempers cool, pointing to a precedent in 2006 when China initially rejected a 71.5 per cent price rise and then changed its mind. Rio iron ore boss Sam Walsh said the settlements so far showed customers favoured the price certainty that the benchmark system provided. "Each year the pricing negotiations are tough and this year is no exception, although the situation is becoming clearer as more customers settle to the same terms," he said. CISA has recently threatened to direct Chinese mills to consume the country's large iron ore stock piles and blackball Australian imports as a ploy to force Rio to accept steeper cuts. Analysts are sceptical as to whether such a game of brinkmanship could work and whether CISA has the industry authority to bring hundreds of Chinese mills into line. AME Mineral Economics resources analyst John Bruyn said all eyes would turn to Brazil's Vale, the world's largest iron ore exporter, to see what price it struck with China. "Vale could be the wild card," he said. "I am looking for a settlement with the Chinese out of Vale to see how that changes the dynamics. China will be feeling a lot of pressure because these other guys that have accepted the deal are some of the world's largest steel mills." Rio shares jumped $2.67, or 4 per cent, to $69.
GBG Price at posting:
76.4¢ Sentiment: None Disclosure: Held
