May 28, 2009

Rio Tinto deal with Nippon Steel foreshadows drop in steel prices

MELBOURNE, Australia

Rio Tinto Ltd., the world’s third-largest miner, said Tuesday it has agreed with Japan’s Nippon Steel Corp. to cut its iron ore prices for this year by a third, foreshadowing a wider industry slump in prices.

Rio Tinto agreed to sell its Pilbara and Yandicoogina fine ores at 97 cents US per dry metric ton unit versus 144.66 cents last year, a reduction of 33 per cent, to Japan’s biggest steel maker.

Higher-quality lump will sell for 112 cents a ton, down nearly 45 per cent from 201.69 cents. Overall, the blended average price reduction — which applies to all iron ore delivered during the year from April 1 — was 37 per cent.

As the first major contract announced in the steel industry this year amid slumping demand from the construction and car manufacturing industries, the Rio deal is expected to set a benchmark for negotiations between other iron ore producers and steel makers.

“We believe this settlement is a realistic outcome for both parties, one that reflects the global market for iron ore and the current challenging market conditions facing our customers,” said Rio Tinto iron ore chief executive Sam Walsh.

BT Investment Management resources analyst Tim Barker said the new contract prices were higher than some commentators had tipped and that other producers would probably follow Rio Tinto’s lead.

“I would suspect that we will see the Japanese, Koreans and Taiwanese settle in line with these figures and it will probably be with most of the producers,” Barker said.

But Chinese steel makers would probably hold out for a better deal. “I don’t think there will be a quick settlement with the Chinese,” Barker said.

China’s annual negotiations with overseas iron ore suppliers are dragging on, according to the government-affiliated China Iron & Steel Association, which vehemently denied reports that Chinese steel makers had settled for 30 per cent to 35 per cent price cuts.

“China’s steel industry and those of Japan and Korea are facing severe shocks from the global financial crisis,” CISA said in a statement posted on its Web site last week. It said the annual negotiations were continuing on a basis of “mutual interest and long-term stability.”

Unlike in previous years, when Shanghai-based Baosteel Group led the talks, this year CISA is handling the negotiations. Analysts say it is seeking at least a 40 per cent cut in this year’s benchmark prices.

Associated Press

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