Miners Stall on Iron-Ore Price Talks

Miners Stall on Iron-Ore Price Talks

The world’s steelmakers want at least a 10% reduction in iron-ore prices, but miners are determined to keep prices level as the two sides begin secretive contract negotiations in what looks to be a bust year for all commodities.

The outcome of those annual talks will affect the price of steel and is being closely watched by automobile companies, equipment makers, construction firms and other big steel users looking for cost relief in a weak economy. Some industry watchers believe iron-ore prices could be as much as 30% lower than 2008 levels, which could put downward pressure on steel prices.

BHP Billiton, Rio Tinto and Companhia Vale do Rio Doce aren’t rushing to begin talks, thinking they will be in a better position to bargain in April. Vale and BHP didn’t attend some scheduled preliminary meetings last week with Chinese steelmakers, figuring it was in their best interest to delay contracts in the belief that prices will rise.

“We want hold off as long as we can,” said one miner. Miners are generally hoping to keep the current price of $90 a metric ton, which is what steelmakers paid in 2008.

At the same time, steelmakers are pushing for an early agreement, wanting to lock in current spot-market prices of $80 a metric ton and fearing that they could quickly rise when the economy strengthens. They tried unsuccessfully to move the contract period to a calendar year, rather than April to April as has been the case for several years.

In either case, the price is far below the peak of $200 a metric ton that iron ore fetched earlier last year on the spot market. By the end of the year, iron ore was selling at about $60 on the spot market, but has climbed to about $80 since then. The increase reflects widespread mine closures that took large amounts of supply out of the market.

Vale, which makes more iron ore than any other miner, said that it produced 21% less ore in the last three months of 2008 than in the same period a year earlier. Rio Tinto, the world’s second-largest provider of iron ore, said its production fell 18% in the same period.

Given the shaky global economy, it isn’t at all certain that iron-ore prices will continue to climb or stall out, even with the production cutbacks. Thorsten Zimmermann, an analyst with HSBC, believes iron-ore prices will decline 30% in 2009, putting steelmakers in an “excellent position to negotiate lower prices.”

Global terms for iron-ore contracts will likely be set by the Chinese steel industry, headed by Baoshan Iron & Steel Co. and the China Iron & Steel Association, which have been the first in recent years to enter talks with big iron-ore producers. Those terms, which could become final by March, are generally accepted by all steelmakers world-wide.

Steelmakers have attempted to band together to get some leverage over the larger mining firms that supply them with raw materials. But in large part, the steelmakers have been unsuccessful.

By Robert Guy Matthews

Wall St. Journal


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