UPDATE: Fortescue Cuts Iron Prices By 35% For Chinese Mills
August 16 2009 - 11:04PM
Dow Jones News
Chinese steel mills and Australian miner Fortescue Metals Group
Ltd. (FMG.AU) Monday said they have reached an agreement on iron
ore prices that represents a 35% discount from last year's term
prices.
The China Iron and Steel Association, which represented Chinese
steel mills in this year's price negotiations, said the price
agreed is 94 cents per dry metric ton unit for iron ore fines, the
grade that most Chinese mills buy.
That is about 3% below the 97 cents a dry metric ton unit that
Australian miners Rio Tinto Ltd (RTP) and BHP Billiton Ltd. (BHP)
agreed with Japanese and South Korean steel makers for iron ore
fines earlier this year.
Fortescue will sell iron ore pellets at 100 cents/dry metric
ton, down 50.42% from 2008 levels.
Fortescue Chief Executive Andrew Forrest said the deal breaks
the market impasse that had enveloped the Chinese steel industry,
creating uncertainty and increasing the risk for individual
companies.
It is the first time Fortescue is setting a term price for its
supplies to China and in a departure from past practice, the deal
is only for six months with prices to be renegotiated after
that.
The deal is only a small step forward for China which is yet to
agree on this year's term prices with bigger miners such as Rio
Tinto, BHP Billiton and Vale S.A (VALE) which together control
around 70% of the global sea-borne trade in iron ore.
Fortescue didn't have a term price agreement last year and its
annual capacity is around 45 million tons, a very small amount
considering China has regularly been importing in excess of 50
million tons of iron ore a month this year.
But announcing the deal at a news conference, CISA said it hoped
the terms of its deal with Fortescue will be accepted by the big
three miners.
"We need to (talk) further with (those) other miners," and the
association hopes the pricing terms struck with Fortescue will be
the basis for those talks, CISA Vice Chairman Luo Bingsheng
said.
Both BHP and Rio Tinto declined to comment on CISA's latest
agreement with Fortescue.
The pact with Fortescue, a miner with big ambitions in China, is
the first the Chinese have made in their protracted iron ore
negotiations this year. Despite Rio Tinto, BHP and Vale setting
prices with other Asian mills at a discount of around 33% for iron
ore fines, the Chinese have been holding out for deeper price
cuts.
China has insisted that as the biggest buyer of the product, it
should have a greater say in pricing decisions. More recently, the
price talks have also got entangled in a controversy surounding
China's detention of four Rio Tinto employees on charges of
securing information related to price talks using illegal
means.
Fortescue said its deal with Chinese mills is conditional on the
completion of a funding deal with Chinese financiers for between
$5.5 billion and $6 billion by Sep. 30.
As the deal is part of an arrangement to secure financing, it is
unlikely to have a negative flow-on effect for spot prices, said
Justin Smirk, senior commodities analyst with Westpac in
Sydney.
Fortescue is willing to forego price in return for funding
security given the company is a small player which wants to get
itself into position of strength in the longer-term, Smirk said.
"Naturally China is going to try and leverage this deal for
pricing, but the size of the deal looks too small."
But Fotescue's Forrest said the deal was important for the
company as well as the overall industry. "It creates a realistic
and agreed iron ore price that delivers value for all parties and
provides strong support for Fortescue's continued growth," he
said.
The contract with Fortescue runs from July 1 through Dec. 31,
2009, CISA said. It will start iron ore negotiations for the 2010
term in December, it said.
-By Chuin-Wei Yap, Juan Chen and Alex Wilson, Dow Jones
Newswires; 8610 6588-5848; chuin-wei.yap@dowjones.com