steel mills talks - io spot 80% above contract

Steel mills feel the heat in iron ore talks as spot price soars
Sarah Jane Tasker From: The Australian January 06, 2010
ASIAN steel mills could push to settle annual iron ore contract prices with major producers early this year as the spot price soars.

80 per cent above the benchmark set last year with Japan.

But China might again refuse to accept the benchmark agreed to with Japanese and Korean steel mills, as it did last year. There is speculation that iron ore producers are seeking a rise of up to 30 per cent, more than twice what the economic powerhouse is prepared to agree to. "With spot iron ore now trading at a theoretical premium of 80 per cent to the Japanese contract price, there must be a growing motivation for mills to lock in contract prices sooner rather than later and concede bigger price hikes than our 20 per cent forecast for Australian fines," Goldman Sachs JBWere analyst Malcolm Southwood said.

The spot price is around $US123 a tonne, including freight, compared to the contract price of $US61 a tonne set with Japanese and Korean steel mills. The difference is about 80 per cent when freight is taken into account.

An industry insider said demand and the spot price could be high throughout the negotiations.

The China Iron & Steel Association has already indicated that the iron ore giants are seeking an increase of up to 30 per cent, which could fuel another long battle between China and the major miners.

Last year's talks stalled after June 30, when Rio Tinto told Chinese customers it would not budge on the 33 per cent discount set with Japan but CISA insisted on a deeper cut.

The arrest of four Rio Tinto executives, including Australian Stern Hu -- the head of its iron ore unit in China -- further complicated negotiations.

One analyst said it was likely the first contract this year would be settled between Brazil's Vale and European steel mills, which could pave the way for talks with Asian steel mills.

"The Chinese, as the largest consumer, do have a say, but will have less of a say if Vale settle up to a 30 per cent rise with the Europeans," he said.

"If the Japanese or European mills approach Rio or Vale and offer up to a 35 per cent increase, the miners could agree."