Brazil's Vale Likely Cut Ore Contract With China By 27%-Estado
May 26 2009 - 1:06PM
Dow Jones News
Brazilian mining mammoth Vale S.A.(VALE) is likely to settle its
annual iron-ore term contract at around 27% below last year's
price, the Estado news agency reported Tuesday.
The expected settlement amount is based on analyst reports from
Goldman Sachs and JPMorgan.
The reports follow Rio Tinto's (RTP) agreement to cut ore prices
to Japan's Nippon Steel (NISTY) by between 33% and 44% for the year
starting April 1.
Contacted by Dow Jones Newswires, Vale executives would not
comment on the Rio Tinto settlement.
JPMorgan's estimate of a 27% cut in Vale term prices is based on
its belief Vale will receive compensation for not having as high a
settlement in China as Australian miners managed last year.
Vale has stated it will not close any deal with China this year
until Australia's Rio Tinto and BHP Billiton (BHP) have
settled.
The bank also believes the price managed by Rio Tinto in Japan
is favorable for miners given the sharp fall in global steel
output.
Goldman Sachs pointed out that Vale's price cut would be less
than that of Australian miners because of its superior quality.
There are still doubts as to whether the Rio Tinto Japan price
will be adopted as the benchmark for the region.
"Despite today's agreement, the mining industry is, in our view,
in a period of transition toward new price mechanisms," said a
JPMorgan analyst.
The bank said the spot market and benchmark systems will coexist
in future, until the latter loses importance.
Vale has always said it prefers the existing benchmark system,
which involves leading suppliers and clients coming together and
setting an annual price for the whole market. In recent years, Vale
and China have set the benchmark.
JPMorgan expects China will resist settlement at the Rio Tinto
and Nippon level. The bank noted that China has been firm in
demanding a reduction of between 40% and 45% this year.
However, Goldman Sachs believes China should accept that level
of settlement as it is below current local spot prices.
According to the bank, the 27% price cut would put Australian
ore deliveries in China at $71.90 a ton, Vale at $80.30 to $86.60
and Chinese local ore at $86.
At 1615 GMT, Vale was trading 1.01% higher at BRL32.97
($16.28).
Other analysts believe a benchmark may not be set this year and
a significant amount of iron ore sales will be on the spot
market.
-By John Kolodziejski, Dow Jones Newswires; 55-21-2586-6086;
john.kolodziejski@dowjones.com