Steelmakers secure 35pc price cut from Fortescue

PUBLISHED : Tuesday, 18 August, 2009, 12:00am
UPDATED : Tuesday, 18 August, 2009, 12:00am

Trying to break deadlocked talks with the Big Three iron ore suppliers, mainland steelmakers have won a 35 per cent price cut from Fortescue Metals Group - 2 percentage points better than the benchmark set by iron ore giant Rio Tinto.

The deal, in which mainland steelmakers would provide up to US$6 billion in funding for the Australian miner's expansion, is widely viewed as a face-saving deal for the China Iron and Steel Association (Cisa), the country's lead negotiator.

However, the price is only marginally lower than what Rio demanded. It is uncertain whether Rio, BHP Billiton and Vale will compromise and accept the same price.

Cisa said yesterday that Fortescue, Australia's third-largest iron ore exporter, had agreed to supply 20 million tonnes of iron ore between last month and December to mainland mills at 94 US cents per dry tonne for ore fines. This is a 35 per cent cut from the previous year.

Yao Jian, a spokesman for the commerce ministry, welcomed the 'new model' of negotiating prices outside talks with the Big Three.

Fortescue, which started production last year with an annual capacity of 50 million tonnes, has not previously participated in the 40-year-old ritual of price negotiations.

Beijing will give Fortescue, in which mainland steelmaker Hunan Valin Iron and Steel has a 16.5 per cent stake, the priority to negotiate prices for next year.

Cisa vice-chairman Liu Zhenjiang hailed the deal as an important step for the world's biggest iron ore buyer.

'It is hard to be fair to China if another country, with only 10 million to 20 million tonnes of imports, decides prices for China, which imports 500 million tonnes a year,' he said.

In May, Japan and South Korea agreed to the 33 per cent cut with Rio, effectively setting the benchmark.

Cisa secretary-general Shan Shanghua said China would use the latest price as the new 'reference' for negotiations with major suppliers. Cisa had earlier demanded a cut of as much as 45 per cent. But a Rio spokesman said the pricing deal was irrelevant to the company. BHP and Vale declined to comment.

Xu Xiangchun, chief information officer of steel consultancy Beijing Ganglian Maidi e-Commerce, said the Big Three were unlikely to make any concessions.