Steel firms, ore miners fail to reach agreement

Chinese steelmakers have reached an impasse with global iron ore suppliers as they seek to batter down annual contract prices for the raw material amid the global economic slump.

The steelmakers failed to reach any agreement by yesterday's deadline but will continue talks to save the 40-year-old benchmark system from being replaced by more volatile pricing on the spot market.

Rio Tinto, the world's second-biggest iron ore producer, yesterday said it had not reached any agreement with its Chinese customers and some contracts might revert to spot market pricing from today.

'Rio has long been a supporter of the benchmark system but if customers opt to buy on the spot market instead, they will,' said Gervase Greene, a Perth-based spokesman for Rio.

Officials from the China Iron and Steel Association (Cisa), the country's lead negotiator, refused to comment.

Maanshan Iron & Steel general manager Su Jiangang said mainland steelmakers would continue talking with ore miners to establish a contract price.

'There was no agreement reached today (June 30), but talks could carry on even after the deadline,' Mr Su said.

A breakdown of the talks may push steel mills to the volatile spot market to source ore. Big mills such as Maanshan Steel prefer long-term benchmarked contracts from overseas suppliers because it makes it easier to predict costs.

In the past, contract prices had always been lower than spot prices but the plunge in spot prices in the second half of last year had reversed the situation, analysts said.

Rio settled in May with Japanese and South Korean steelmakers for a 33 per cent reduction in fine ore prices, the first settlement for the year.

Brazil's Vale last month said it agreed a smaller 28 per cent price reduction for fine ores with Japanese and Korean mills, bringing its prices on par with Rio as the world's biggest iron ore producer negotiated a smaller rise last year.

So far, BHP Billiton has not formally announced any deals with Asian mills although it is supposed to have followed Rio's pricing.

Cisa has demanded a 40 to 45 per cent price cut and has threatened to cut steel production if talks fail, saying a 33 per cent reduction would drive mainland steelmakers into losses.

However, the bargaining power of Cisa has been weakened by a recent recovery in both steel and iron ore prices.

Spot iron ore prices in China have gained about 20 per cent since Rio announced its first settlement, making the price almost level with the contract price Rio is offering.

Last year, discussions had also dragged on past the June 30 deadline and two benchmarks were set, one by Australian miners Rio and BHP the following month and another by Vale in February.

Vale chief executive Roger Agnelli last week said the company was in no rush to finish iron ore price talks with Chinese customers.

More is bad

A recovery in steel and ore prices has weakened steelmakers' argument

Since Rio's first settlement, spot iron ore prices in China have gained about: 20%