Chinese steel mills want bigger discount

PUBLISHED : Wednesday, 27 May, 2009, 12:00am
UPDATED : Wednesday, 27 May, 2009, 12:00am

Mainland steelmakers will continue to press for a deeper discount on contract iron ore price after Japanese steelmakers agreed with Rio Tinto Group on a 33 per cent cut, a move that may further complicate the broken 40-year-old pricing system.

The China Iron & Steel Association (Cisa), which is leading contract talks on behalf of the country's mills, had reached a preliminary opinion with steelmakers that this year's price should drop at least 45 per cent, said Fu Jihui, an executive director of Angang Steel.

'A 33 per cent price cut is not enough and reasonable, compared with the fall in global steel prices,' Mr Fu said. 'Negotiations are still going on.'

Rio, the world's second-largest iron ore exporter, yesterday said it had agreed to sell its fine ores to Nippon Steel, JFE Holdings and Sumitomo Metal at 97 US cents per dry tonne against 144.66 US cents last year, a reduction of 33 per cent, for the year beginning from last month.

Higher-quality lump had a deeper 44.5 per cent cut to 112 US cents a tonne, but it was not as indicative since mainland mills mainly buy iron ore fines.

Cisa held an emergency meeting yesterday to discuss the settlement and the negotiation tactics after Japanese steelmakers agreed on the contract prices, an executive of a steel mill said.

After the price cut, the new fines price including transport, insurance and other costs was still 5 to 10 per cent higher than spot price, said Xu Xiangchun, the chief information officer of Beijing Ganglian Maidi E-commerce, a steel data provider.

'It is clear that Cisa will continue to seek a bigger discount, but the outcome is hard to predict,' said Mr Xu.

Price negotiations this year were complicated by the long-standing practice in which all suppliers agreed on the same margin adjustment, he said.

Last year, two benchmarks were set, one by Brazil's Vale and another by Australian miners Rio and BHP Billiton.

Although the settlement between Rio and Japanese steelmakers did not bode well for mainland steelmakers, the impact would be limited, said Wang Zhe, an analyst at China Securities.

'At present, the critical factors affecting steelmakers' profitability are steel demand and prices, not raw materials costs,' Mr Wang said.