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Fortescue Metals may join ore price negotiation

By Tong Hao (China Daily)
Updated: 2008-12-05 16:30

Baosteel, China's biggest steel maker, is considering inviting Fortescue Metals Group (FMG), the third largest mining group in Australia, to participate in iron ore price negotiation, a move analysts said would help it gain bargaining power with other iron ore producers.

FMG has recently reached a cooperation agreement with Hunan Valin Iron & Steel Group, a steel maker in central China, in the hope of cushioning the impact brought about by the global financial crisis, by relying on the vast Chinese market.

Shanghai-based Baosteel is mulling inviting FMG into the iron ore price negotiations, Shanghai Security Journal reported, without giving details.

"If FMG is involved in the negotiation, it will compete against BHP Billiton and Rio Tinto for market share, which is likely to help bring down prices," said Hu Kai, an analyst from Umetal.com.

Due to the price domination of the three giant suppliers, Brazil's Vale, Australia's BHP and Rio Tinto, the average CIF (cost, insurance and freight) price of iron ore has increased by 70 percent to $141 per ton in the first 9 months of this year.

However, the price of steel products has plunged in the past 2 months because of the global financial crisis.

According to China Iron & Steel Association (CISA), the iron ore stocked in ports nationwide hit 89 million tons by October 15.

Hu estimates it is likely to cause 30 billion yuan ($4.38 billion) of potential losses to the Chinese steel industry.

The 2009 iron ore price negotiation has already started. "The huge amount of iron ore stock and the increasing domestic ore supply provide a great opportunity for CISA and Baosteel to improve the negotiation mechanism," said Xu Xiangchun, an analyst of industry information provider Mysteel.

FMG takes charge of a prospect area of 40,000 square kilometers in Australia with a potential reserve of 4.2 billion tons. Its production in 2008 is expected to reach 12 million tons, which will grow to 100 million tons in 2010 and thus become the world's fourth largest iron ore supplier.