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 the Anglo-Australian
benchmark set last year.
The China Iron and Steel Association, which represented Chinese
steel mills in this year's price negotiations, said the two sides
have agreed on a price of 94 cents per dry metric ton unit for iron
ore fines, the grade that most Chinese mills buy.
That about 3% below the 97 cents a dry metric ton unit for the
same grade that Australian miners Rio Tinto Ltd (RTP) and BHP
Billiton Ltd. (BHP) agreed with Japanese and South Korean steel
makers earlier this year.
Fortescue will sell iron ore pellets at 100 cents/dry metric ton
unit, 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 risk for individual
companies.
The Chinese government was quick to endorse the deal, saying it
could lead to a more balance outcome for Chinese mills and global
miners.
"The iron ore deal reflects adequate negotiations on both
sides," Commerce Ministry Spokesman Yao Jian said at a press
briefing.
But analysts said it was unlikely this could become an industry
benchmark given Fortescue is relatively smaller supplier and that
it's ore is of a slightly inferior quality.
Rio Tinto also played down the development, saying the deal
won't have any bearing on its own price talks with China. "We do
not see this pricing agreement as relevant to our pricing for
fiscal 2009," a Rio Tinto spokesman said. "Rio Tinto conducts its
own negotiations with its customers worldwide. Whether and how
other producers reach their own agreements is up to them."
BHP declined to comment.
It is the first time Fortescue is setting a term price for its
ore and in a departure from the past, the price is valid only for
six months, with the terms to be renegotiated after that.
Fortescue shares initially rose 4% following the announcement.
The stock is still up 2.7% at A$4.57 compared with an overall
market that is down 0.9%.
The deal is a small step forward for China which is yet to agree
on this year's term prices with bigger miners such as Rio, BHP and
Vale S.A (VALE) which together control around 70% of the global
sea-borne trade in iron ore. In the past, the big three have taken
the lead in setting prices which are usually for the full contract
year starting April 1.
The contract with Fortescue runs from July 1 through Dec. 31,
2009, CISA said adding it will start iron ore negotiations for the
2010 term in December.
Announcing the deal at a news conference, CISA said it hoped the
terms of this deal will be accepted by the big three miners.
"We need to (talk) further with 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.
Difficult To Make China-Fortescue Deal A Benchmark
Fortescue, a relatively new entrant with big ambitions in China,
is the first to strike a price deal with Chinese mills following
protracted price 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,
price talks have also got entangled in a controversy surrounding
China's detention of four Rio Tinto employees on charges of
securing information related to price talks using illegal
means.
But analysts said the deal with Fortescue is too insignificant
and may not become an industry benchmark.
Fortescue has an annual capacity of only 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.
Fortescue's deal is also conditional on the completion of a
funding arrangement 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."
Moreover, the deal only offers China a relatively small discount
from the Anglo-Australian benchmark this year, said Henry Liu, an
analyst with Macquarie Research. Fortescue offers an ore grade of
59%, which means it is of a lower quality than the kind offered by
Rio or BHP, he said.
"At the kind of ore grade Fortescue offers, the free-on-board
price of 94 cents amounts to about $55 a metric ton of ore," Liu
said. "The other Australian miners are offering $57-$58 a ton. So
the discount is really not that big."
Also, Fortescue supplies only China, while other miners have
already struck benchmark deals in Japan, Korea and Europe, and
can't change their contract terms willy-nilly, so it's unlikely
they will take Fortescue's cue, Liu said. "This is more of a
face-saving issue for China."
-By Chuin-Wei Yap, Juan Chen and Alex Wilson, Dow Jones
Newswires; 8610 6588-5848; chuin-wei.yap@dowjones.com