Fortescue cuts iron prices by 35pc for Chinese mills
CHINESE steel mills and Fortescue Metals Group have reached an agreement on iron ore prices that represents a 35 per cent discount from last year's term prices.
The China Iron and Steel Association, which represented Chinese steel mills in this year’s price negotiations, said the price agreed is US94c per dry metric tonne unit for iron ore fines, the grade that most Chinese mills buy.
That is about 3 per cent below the US97c a dry metric tonne unit that Australian miners Rio Tinto and BHP Billiton agreed with Japanese and South Korean steel makers for iron ore fines earlier this year.
“This price equates to approximately $US55.50 per dry tonne for Fortescue grade iron ore,” the company said. Fortescue's ore is a slightly lower quality than Rio and BHP's.
Rio Tinto said today the iron ore price agreed by Fortescue with Chinese steelmakers had no 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."
Fortescue will sell high grade lump at US$1 a dry metric tonne, which equates to around $US61 a tonne, down 50.42 per cent from 2008 levels.
In May, Rio Tinto finalised a new agreement for its Hamersley products with Nippon Steel, which saw the price for fines decline - for the first time in seven years - by around 33 per cent to $US62 a tonne and the price for lump fall 44 per cent to around $US71 a tonne.
BHP Billiton soon followed on similar terms but China has continued its resistance to settle the benchmark with the majors.
Fortescue chief executive Andrew Forrest said the deal breaks the market impasse that had enveloped the Chinese steel industry, creating uncertainty and increasing the risk for individual companies.
"We are comfortable in the fairness and equity of that price level," Mr Forrest said.
Mr Forrest also rejected suggestions that the deal was not in Australia's interests as it undermined Rio Tinto's efforts to strike a higher price, and said he did not believe Fortescue was being used by China in its battle to win lower prices from the major producers.
"We are not a pawn in anyone's game," he said.
It is the first time Fortescue is setting a term price for its supplies to China and in a departure from past practice, the deal is only for six months with prices to be renegotiated after that.
The deal is only a small step forward for China, which is yet to agree on this year’s benchmark prices with bigger miners such as Rio Tinto, BHP Billiton and Brazil’s Vale, which together control around 70 per cent of the global seaborne trade in iron ore.
Fortescue didn’t have a term price agreement last year and its annual capacity is around 45 million tonnes, a very small amount considering China has regularly been importing in excess of 50 million tonnes of iron ore a month this year.
But announcing the deal at a news conference, CISA said it hoped the terms of its deal with Fortescue will be accepted by the big three miners.
“We need to (talk) further with (those) other miners,” CISA Vice Chairman Luo Bingsheng said, adding that the association hopes the pricing terms struck with Fortescue will be the basis for those talks
Both BHP and Rio Tinto declined to comment on CISA’s latest agreement with Fortescue.
The pact with Fortescue, a miner with big ambitions in China, is the first the Chinese have made in their protracted iron ore negotiations this year. Despite Rio Tinto, BHP and Vale setting prices with other Asian mills at a discount of around 33 per cent 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, the price talks have also got entangled in the controversy surrounding China’s detention of four Rio Tinto employees on charges of securing information related to price talks using illegal means.
Fortescue said its deal with Chinese mills is conditional on the completion of a funding deal with Chinese financiers for between $US5.5 billion ($6 billion) and $US6 billion ($7.2 billion) by September 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, Mr Smirk said.
“Naturally China is going to try and leverage this deal for pricing, but the size of the deal looks too small.”
But Fotescue’s Mr Forrest said the deal was important for the company as well as the overall industry.
“It creates a realistic and agreed iron ore price that delivers value for all parties and provides strong support for Fortescue’s continued growth,” he said.
The contract with Fortescue runs from July 1 through December 31, 2009, CISA said. It will start iron ore negotiations for the 2010 term in December, it said.