Brazil Vale's Asian Contracts Cut China Bargaining Power
June 10 2009 - 2:34PM
Dow Jones News
The iron ore price deal that Brazilian mining giant Vale
S.A.(VALE) reached with Japanese and Korean mills Wednesday means
big Chinese customers will be hard-pressed to gain the large cuts
they want.
"This has significantly reduced China's negotiating powers,"
said Cristiane Viana, a mining analyst at Rio de Janeiro's Ativa
brokerage.
"The two biggest miners have settled and it will now be very
difficult for China to get a better deal," she said, referring to
Vale and Rio Tinto (RTP), which settled earlier this month with
Asian mills.
Industry watchers say negotiations with China are likely to be
settled in the next few weeks, especially if Vale has sealed deals
with 38 small, privately owned Chinese steel mills for the sale of
50 million metric tons of iron ore this year, as the Beijing News
reported Wednesday.
The report didn't specify price levels.
Vale spokesmen would not comment on the Beijing News report, nor
on the implications of the latest agreements in the company's talks
with the Chinese steel association and heavyweight Baoshan Iron
& Steel Co, which want a cut of 40% or more off last year's
benchmark.
Earlier Wednesday, Vale agreed to a 28.2% reduction for iron ore
fines with South Korea's Posco (005490.SE) and Japanese steelmaker
Nippon Steel Corp. (5401.TO) along with other Japanese mills, the
miner said. Lump iron ore prices will slide 44.47%, while iron
pellet prices, much prized for their efficient use in blast
furnaces, will decrease 48.3% from the 2008 contract price.
The fall in 2009 iron ore prices follows a steep drop-off in
iron ore demand due to the global economic slowdown.
Vale has been waiting on the sidelines this year, opting to
allow rivals BHP Billiton Ltd. (BHP) and Rio Tinto PLC (RTP) to set
market prices with China for 2009. Last year, Vale had reached an
early deal with Asian steelmakers, only to see those prices topped
by ore from Australia when rival miners were able to wrangle a
proximity premium.
Analyst Leonardo Alves of Brazilian brokerage Link Corretora
said Vale's Wednesday agreement with the Asian mills came in line
with market expectations, which had pegged the drop for iron ore
fines at 27% to 30%.
"What's important is there were no surprises," Alves said.
"After Rio Tinto agreed on a price with Japanese and Korean mills,
it became clear Vale would also settle prices at similar
levels."
The price cut was the first since 2002, but that year the
decline was a mere 1%, a Vale spokesman said.
Last year, Vale won 65% to 71% rises in benchmark prices for the
various iron ore grades.
Analysts noted this year's price cut may not be as dramatic as
it seems. "The impact on Vale's bottom line should be neutral and
we recommend Vale as a Buy, as the price decision was already
factored in," said Viana. After rising earlier in the session, by
Wednesday afternoon Vale's New York Stock Exchange-traded shares
were off 1% at $19.59.
The price-cut impact on Vale's day-to-day cash flow would "not
be very big," Viana said.
Viana pointed out that much of Vale's recent ore sales already
carried a 20% discount. Since April 1, Vale has been giving Chinese
mills a 20% provisional discount, which will be adjusted once the
benchmark price is set.
-By John Kolodziejski, Dow Jones Newswires; 55-21-2586-6086;
john.kolodziejski@dowjones.com