Steelmakers seek deal with ore miners

Updated: 2011-11-01 10:53

By Zhang Qi (China Daily)

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BEIJING - Iron ore prices may further decline amid weak demand and high stockpiles, and they could shift to a new pricing mechanism, a top official from China's steel lobby said.

Zhang Changfu, vice-chairman of the China Iron & Steel Association ,said Chinese steel companies are talking with the world's big three miners, Vale SA, Rio Tinto Group and BHP Billiton Ltd, to set up a new pricing mechanism, which could benefit both parties.

His remarks came after a plunge in the spot iron ore market. The iron ore price fell 32 percent last month to a record low of $120 a ton on Friday, due to slowing steel demand from property developers, automakers and the machine building industry.

"Iron ore stockpiles at nine major ports reached a record high of 980 million tons, most of which was bought at $165 a ton. But the price is around $120 a ton now. How can steel mills and iron ore traders deal with this high priced iron ore?" Zhang said, adding that iron ore prices could continue to fall as there is no demand recovery in sight.

Prices may drop to as low as $95 a ton in the short-term before rebounding next year, Morgan Stanley analysts Peter Richardson and Joel Crane said on Monday in an e-mailed report, according to Bloomberg. Prices are expected to average $160 a ton next year as China's steel mills restock and a supply deficit persists, the report said.

Vale, the world's largest iron ore producer by output, said last week that most Chinese customers are trying to replace quarterly contracts with spot pricing.

Baosteel held talks with Vale to renegotiate iron ore prices. The iron ore contract prices will be lower in the fourth quarter and the new pricing mechanism is moving closer to the spot prices, Ma Guoqiang, the general manager of Baoshan Iron& Steel Co Ltd, said on Monday.

Ma also said iron ore supply will exceed demand next year as several iron ore projects come on stream.

Tom Albanese, chief executive of Rio Tinto, said in Sydney at an analyst forum on Oct 24 that the current market weakness is accelerating the move to shorter pricing methods and closer to spot.

Marcus Randolph, chief executive of BHP's ferrous and coal business, said last month the company has been selling by far most of its iron ore at a monthly pricing mechanism, compared with Vale and Rio's quarterly contracts.

"The Chinese steel industry has entered into a harsh period," said Zhang from CISA. According to CISA data, the average profit ratio of 77 large and medium sized steel companies was 2.99 percent.

Spinning off steel mills' mining earnings and investment return, the average profit ratio only touched 1.5 percent, Zhang said.

Baosteel said its third quarter net profit fell 51 percent on the year due to weaker demand and high raw material costs.