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China ready to give ground in iron ore talks - source
Updated: 2009-07-01 16:08

SHANGHAI/SYDNEY: Chinese steel mills, under pressure to compromise on protracted iron ore talks with overseas miners, are set to give ground on prices and may shift to bi-annual price setting, a source in China said on Wednesday.

Citing officials of the China Iron and Steel Association (CISA), the source, who declined to be identified, told Reuters that China was willing to accept a twice-per-year price-setting regime to end the talks quickly.

Such a shift would modify the decades-old annual pricing system but would still allow mills to anticipate costs over a longer period and provide stability, as against depending completely on the volatile spot market.

The source also confirmed media reports China had softened demands for a hefty price cut after failing to reach a deal by Tuesday's deadline, seen as a first sign of compromise meant to salvage a benchmarking system suppliers argue is outdated.

Citing CISA officials, Caijing magazine and the official Shanghai Securities News earlier said the mills were ready to discuss price rollbacks of between 33 and 40 percent versus previous demands of between 40 and 45 percent.

Rio Tinto declined to comment and BHP Billiton maintained its policy of keeping quiet until most of its contracts are signed.

"I suspect the discount will be relatively marginal. Just some means for CISA to save face," said Ben Westmore, commodities economist for National Australia Bank.

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Goldman Sachs JB Were in a client note suggested a possible compromise would be a switch to an even more limber pricing mechanism such as quarterly pricing, with greater flexibility to reflect short term markets.

BHP Billiton Chief Executive Marius Kloppers has made no secret of his wish to see pricing move to an index system that could be tied to average spot prices every quarter and better reflect market conditions at the time of delivery.

Rio Tinto has been less reluctant publicly to discard the benchmark system that covers shipments between April 1 and March 31, even though spot transactions now make up about 50 percent of overall sales.

Market moves against China

State-run CISA forged its original demands at the height of the world financial crisis amid predictions China's markets for steel would all but disappear, sharply reducing its reliance on imported ore.

A recovery in steel prices at home at least and a rising global spot price for ore has since undermined China's case.

Spot iron ore prices have leapt by a fifth in just a month, to a 4-month high above $80 a tonne delivered in China, equivalent to around $65 free on board. This is higher than the contract price of $61 Japanese and South Korean mills pay.

"By abandoning the benchmark price... Chinese mills run the risk that if the spot price rallies further, they could end up paying higher prices than the rest of the world," Macquarie analysts said on Wednesday in a report.

In another development, some of China's larger mills have tacitly reached agreements with miners and issued letters of credit to buy iron ore at the price accepted by Japanese mills, according to the official China Securities Journal.

Smaller mills, eager to fix costs for the year, have already signed separate pacts with overseas suppliers.

These mills are free to buy ore on their own for the first time this year after a policy whereby Baosteel, China's largest steelmaker, secured the ore then sold it on to smaller steel companies was abandoned, according to Merrill Lynch commodities analyst Tom Price.