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BHP, Rio seek 40% iron ore price rise

February 4, 2010

BEIJNG – Rio Tinto Ltd and BHP Billiton Ltd are asking steel mills in Japan and South Korea to accept a 40 per cent rise in the contract price of iron ore for 2010, a Chinese newspaper said, citing sources.

Traders said the levels looked reasonable, but the steel companies in Japan were not immediately available to comment when contacted by Reuters.

The 21st Century Business Herald quoted a source close to the two companies as saying the first round of talks between the miners and their Japanese and South Korean customers had already been completed.

The Japanese and South Korean mills have accepted that prices must rise this year, and the issue remains by how much, it said.

The newspaper added that Chinese mills – led in the talks by Baosteel – were unwilling to accept an increase of more than 30 per cent, and were looking for a price rise in the region of 20-30 per cent.

The China Iron and Steel Association said at the end of last year that foreign miners were expected to seek a 20-30 per cent increase in benchmark prices for 2010, and made clear that such an increase was unacceptable.

Baosteel refused to comment, but a trader based in eastern China said the figures being suggested on both sides were within expectations.

“I think 40 per cent sounds like a reasonable figure to me, but of course the steel mills will say they can’t accept more than 30 per cent because that is part of the negotiation process.”

Chinese media reports on Tuesday suggested that talks between Chinese steel firms and their major iron ore suppliers had resumed this week in Singapore, but neither the miners nor the mills could confirm this.

Analysts have suggested that Chinese steel mills should take advantage of a recent decline in spot iron ore prices by agreeing a 2010 contract price as soon as possible.

But the trader said it was unlikely the two sides could hammer out a settlement so quickly.

“It is probably now a good time to strike up an agreement but you have to realise that this is a very complex process involving a huge Chinese steel industry – they aren’t going to settle early.”

Last year’s talks led by CISA ended in stalemate, with the association being criticised over its inflexible negotiating tactics, when its attempt to strongarm the miners into offering a lower “China price” ended in failure.

Chinese steel firms were eventually forced to accept the “interim” benchmark price agreed by Rio Tinto with Japanese mills.

Rio sees metals demand doubling in 15 years.

Meanwhile, a Rio Tinto official has tipped that economic growth in China and India is likely to double global demand for aluminium, iron ore and copper over the next 15 years, requiring a big response from miners.

Short-term demand was more difficult to gauge, Rio chief financial officer Guy Elliott said, because of concerns over government stimulus packages and speculative activity linked to low interest rates.

“For the longer term, I feel that the intensity of use of some materials in India and China will lead to a doubling in global demand for aluminium, iron ore and copper over the next 15 years,” Elliott told the Troika Dialog investment forum.

“The demand will be so strong in the long term that it will require a great supply response. It is possible to see that this combination of demand and supply will elevate prices,” he said.

Rio Tinto is the world’s second-largest iron ore miner and aims to boost production by 6 per cent in 2010, encouraged by much higher spot prices as China’s steel industry – the world’s largest – gobbles up more raw materials.

However, Rio Tinto is running some of its aluminium smelters at below capacity. Though aluminium prices have recovered from the depths of the global financial crisis, LME warehouse stocks worldwide are still above 4.6 million tonnes.

Elliott said monetary policy in the United States was creating “a few concerns” for non-Chinese growth in demand for industrial metals.

“So a mixed picture in the short term,” he told the conference, “but in the long term, there is a strong picture rising from increasing urbanisation of China and India.”

BHP shares closed 2.57 per cent higher at $41.50, against a 0.92 per cent rise on the benchmark index.

Rio rose 1.39 per cent to $72.

 

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