China steel mills resist Rio's demand for "ridiculous" iron ore premium
January 24, 2017, 03:25:00 AM EDT By Reuters
By Manolo Serapio JrMANILA, Jan 24 (Reuters) - Chinese steel mills have balked
at global miner Rio Tinto's plan to charge a
premium in long-term contracts for its highest grade of iron
ore, rekindling the conflicts that caused the collapse of an
annual pricing system seven years ago.
The world's second-biggest iron ore miner is seeking a
premium of at least 15 cents per tonne above the index price for
its flagship Pilbara Blend iron ore product, or PB fines, for
all new long-term contracts, according to sources at two Chinese
steel mills with knowledge of the talks.
Rio sells about 85 percent of its iron ore to China through
contracts that can run up to five years, so a premium for its
top product would boost earnings as the market builds on last
year's unexpected price revival.
But Rio risks a backlash from its Chinese customers, who
provide nearly half of its revenue. Those mills are just
recovering from years of losses.
"As far as we know, none of the steel mills have accepted
this," said a source from a Chinese mill that produces 10
million tonnes of steel a year and has a long-term contract with
Rio.
"I think it's not fair to add some premium, it's not
reasonable, it's ridiculous."
This is the first time Rio has sought a premium on its
long-term contracts with Chinese mills since the industry
ditched a four-decade system of pricing contracts annually in
2010. Since then, the contracts use indexes derived from spot
market deals published by agencies including Platts and Metal
Bulletin.
With iron ore prices tumbling to below $40 a tonne in 2015
from almost $200 four years earlier, miners have sought new ways
to boost revenue.
Rivals BHP Billiton and Vale SA
have in the past secured premiums for their high-grade products,
the source said. But unlike Rio, which is seeking the premium
from all Chinese clients, BHP and Vale only asked certain
customers, the source added.
"It couldn't be accepted by the market," said the head of
iron ore purchasing at one of China's biggest steel producers,
of Rio's demand.
Top iron ore miner Vale said premiums for its high-grade
iron ore such as Carajas fines are determined by the market.
"It is the market who decides the premium daily and the
premium is also published in indexes," Vale said in response to
Reuters' query.
Officials at Rio and BHP did not respond to requests for
comment.
PB fines is popular in China for its low impurity levels as
the country has stepped up anti-pollution efforts in the steel
industry. Amid strong demand, it sold between $1 and $3 a tonne
above the index price last year in the spot market, and the
current premium is $2, two traders said.
Rio earlier sought a premium of up to $1 per tonne from
Chinese mills renewing contracts. [nL4N1DU32W]
Rio secured a record $2.50 a tonne premium for PB fines for
January to April 2017 from trading firms, up from $1.50 in
September to December 2016, two trading sources said.
BLAST FROM THE PAST?
Chinese mills contend the issue is not about the premium
being big or small. "It's about whether it's reasonable," said
the first source at a mill, adding that accepting a premium now
means it can be negotiated higher in future.
"They can't ask for a special premium because we don't have
a special discount when the market is bad," he said.
"Before this, pricing is negotiated every year. If the iron
ore supplier now asks for a premium then we go back to the
previous pricing system. So both iron ore suppliers and steel
mills face a difficult situation."
Because of oversupply, it is difficult for foreign miners to
fix a premium for iron ore, said Li Xinchuang, vice-secretary
general of the China Iron and Steel Association. Scrap steel
supply is also rising as China tackles a glut.
"All outdated facilities will be closed very quickly. Then
there will be a lot of scrap and this will reduce iron ore
demand,"
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