Rio Tinto May Let Iron Ore Contracts Revert To Spot -Analysts
June 30 2009 - 12:30AM
Dow Jones News
Rio Tinto Ltd. (RTP) could allow some of its iron ore contracts
with Chinese steel makers to expire and sell the ore on the spot
market if a pricing agreement isn't reached by the end of Tuesday,
analysts said.
Rio Tinto has already settled annual contract price cuts of
between 33% and 44% with steel mills in Japan, Taiwan and South
Korea but the China Iron & Steel Association, leading the
negotiations for the Chinese mills, is holding out for deeper price
cuts.
Speaking to reporters during a recent conference, Rio Tinto Iron
Ore Chief Executive Sam Walsh said some of the miner's contracts
will expire on June 30, leaving steel mills to subsequently
purchase iron ore in the spot market.
Rio Tinto spokesman Gervase Green declined Tuesday to discuss
details of the miner's contracts with Chinese mills but said one
option is for Chinese steelmakers to buy their ore on the spot
market instead of through long-term contracts.
"We have been a longtime supporter of the benchmark system, but
if the customers do opt to buy on the spot market instead, then
they will be able to, but the ball is in their court," he said.
Rio Tinto would continue to deliver iron ore to its customers
and could do so through a number of methods, including spot sales
and long-term contracts, he said.
One analyst, who didn't want to be named, said he believes Rio
Tinto is likely to allow the contracts to expire and let them
revert to spot sales.
The other two major iron ore producers - BHP Billiton Ltd.
(BHP.AU) and Vale (RIO) - are sitting back and letting Rio and CISA
hammer out an agreement, he said.
Rio's Walsh said earlier this month that the June 30 deadline
had last year acted to accelerate a price settlement to nearly
double prices on the year.
Once a contract expires, it needs to be negotiated from scratch.
It's also not clear what will happen to tonnages supplied on a
provisional basis, one analyst said.
The benchmark system runs from April 1 to March 31, the Japanese
financial year. Should annual talks not settle before April 1, as
is frequently the case, miners supply ore on a provisional basis
that is later adjusted according to the eventual benchmark
price.
ANZ senior commodity strategist Mark Pervan said that while the
details of the structure of Rio's contracts remains hazy, it now
looks likely those with a June 30 deadline could be allowed to
expire.
China has built up a large stockpile of about 100 million metric
tons of ore that could feed the local steel industry for four
month, and this buffer meant CISA was willing to go past the
deadline and risk contracts expiring, Pervan said.
The ore could be sold on a spot basis for a period while the
parties hammer out a restructured pricing system but, with China
being the world's biggest consumer of ore and Rio the second
biggest supplier, an agreement would eventually have to be
struck.
"Whether they annul or not, the point is that they need to sell
to the same customer," Pervan said.
-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094;
alex.wilson@dowjones.com
(Elisabeth Behrmann in Sydney contributed to this report)