China Unlikely To Get 40% Cut In Iron Ore Term Price - UBS
June 02 2009 - 12:10PM
Dow Jones News
Although China is believed to holding out for at least a 40% cut
in benchmark iron ore prices for 2009, it is unlikely to get it,
UBS Pactual said in a report released Tuesday.
According to the UBS report, Rio Tinto PLC's (RTP) recent
agreement to cut contract prices with steelmakers in Japan and
South Korea by 37% will likely galvanize Brazilian mining giant
Vale S.A. (VALE) to accept a smaller cut when it settles with its
main client China.
"We don't believe China will succeed in getting a better price,"
the report said.
RTP agreed the 37% cut with Japan's Nippon Steel (5401.TO) and
South Korea's Posco (PKX), valid from April 1, in the past
week.
Brazil's Vale has made it clear it will settle benchmark
contracts only after the two Australian majors, RTP and BHP
Billiton Ltd. (BHP), have closed their deals.
Vale managed a lower 2008 term contract price than the
Australians and therefore expects to see a smaller reduction in its
2009 contract price.
Vale's higher quality iron ore also commands a premium over its
Australian rivals.
The UBS report also said it expected spot markets likely would
be the future for iron ore sales.
"Traditional buyers, Japan, South Korea, Taiwan and Europe will
likely continue to buy their iron ore on the contract market but we
expect that China will evolve into a major spot buyer," the report
said.
"Ultimately we see the spot market as a growth market, and thus
the revenues for the iron ore producers will increasingly reflect a
larger contribution from spot," the bank explained.
UBS also said it didn't expect much improvement in iron ore
volume sales in 2010.
"We expect a slow recovery in economic activity over the next
year; furthermore we remain concerned that Chinese steel
consumption may be front-end-loaded, responding as it has to both
fiscal and credit policy. Rio is our preferred pick," the bank
said.
-By John Kolodziejski, Dow Jones Newswires; 55-21-2586-6086;
John.Kolodziejski@dowjones.com