rio vale could cut iron ore prices by 82pc

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China May Ask Rio, Vale to Cut Iron Ore Prices by 82%

By Helen Yuan

Dec. 8 (Bloomberg) -- China, the world’s largest iron ore consumer, may ask Rio Tinto Group and rivals to accept an 82 percent price cut for the raw material after steel prices plunged to 1994 levels, an industry official said.

“Iron ore prices should keep pace with steel prices which have fallen to the 1994 level,” Shan Shanghua, secretary in general of the China Iron and Steel Association, said today in a phone interview. “We are asking for a big drop in iron ore prices.”

China’s demands would be more severe than the 50 percent price cut that Australia and New Zealand Banking Group Ltd. has forecast for producers Cia. Vale do Rio Doce, Rio Tinto and BHP Billiton Ltd. All Chinese steelmakers were unprofitable in October as exports and demand from carmakers and builders slumped, the country’s association said.

“It’s going to be a difficult price negotiation as miners and mills are divided in the market outlook,” said Helen Lau, a Shanghai-based analyst with Daiwa Securities Group Inc. “But iron ore prices are determined by demand, not steel prices. The association’s comment is part of negotiating tactics.”

Benchmark contract iron ore fines sold by Rio Tinto, the second-largest supplier, this year cost around $92.58 a metric ton, and it was sold at around $16.685 a ton in 1994, according to Bloomberg calculations. Pushing iron ore prices back to 1994 levels to pace the decline in steel prices in China would mean an 82 percent decline.

First Cut

“Miners’ profit should be pegged to the steelmakers,” the association’s Shan said. “Steel exports and exports of steel- made machines and other goods account for 25 percent of China’s steel output. The exports are unlikely to recover next year.”

An iron ore price cut in 2009 would be the first in seven years. Prices jumped as much as 97 percent for the year started April 1. Merrill Lynch & Co. said Dec. 5 that prices may drop 20 percent next year and BHP may have to cut output by 25 percent.

Vale, Rio and BHP account for three quarters of seaborne traded iron ore. Rio and BHP ship the material from mines in Australia and Vale, the largest supplier, from Brazil.

Chinese steelmakers want the new annual pricing to start from Jan. 1, 2009, instead of from April, and want the prices to be set more frequently rather than on an annual basis, the association’s Shan said.

“It’s the reality that current contracts cannot be fulfilled,’ Shan said. “Many bigger mills don’t need to import till the end of March, some even the end of May.”

China’s iron ore stockpiles at its major ports and warehouses have exceeded a record 100 million tons, he said.

Cut Output

Nanjing Iron & Steel United Co., Maanshan Iron & Steel Co. and other Chinese mills have delayed iron ore imports. London- based Rio Tinto said in November it cut annual output by 10 percent.

“No buyer wanted to build stocks ahead of April 1 price cuts,” said Macquarie Group Ltd. analysts led by Jim Lennon. Demand for the ore remains “chronically weak,” he said today.

Steel demand in China won’t rebound until at least the second quarter next year even with the government stimulus package, the steel association’s Shan said.

“The market improvement may take a longer time,” Shan said. “It’s even tough work to keep next year’s demand at this year’s level.”

China unveiled a 4 trillion yuan ($581 billion) stimulus plan, investing in housing, roads, railways and airports to try to bolster sagging growth in the world’s fourth-largest economy.

Lakshmi Mittal, chief executive officer of ArcelorMittal, the world’s largest steelmaker, said Dec. 5 steel demand may rebound next year and the company wouldn’t deepen output cuts. The Luxemburg-based company has reduced output by about a third and slashed staff to cope with the global recession.