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Pressure on China to end ore impasse

(China Daily/Agencies)
Updated: 2009-07-07 07:55

Imported iron ore being unloaded at Rizhao Port in Shandong province. Chinese steelmakers face the risk of higher cash prices as the annual contract talks with ore producers are stalled. [China Daily]

China is facing more pressure on the annual contract talks for iron ore supply, which is stalled with producers, because of the increasing cash prices.

Ore for immediate delivery rose to a four-month high of $82.50 a ton in the week ended July 3, according to Metal Bulletin. The China Iron and Steel Association has rejected London-based Rio Tinto Group's offer of a 33 percent cut in annual prices, accepted by Japanese and South Korean mills, and let a June 30 accord deadline lapse.

"If spot prices move for a sustainable period of time to levels higher than the contract prices for 2009-10 set with South Korea and Japan, the willingness to hold out for a better outcome by the Chinese steel mills will lessen significantly," said Tim Schroeders, who helps manage the equivalent of $1 billion at Pengana Capital Ltd in Melbourne.

Related readings:  Iron ore talks go into extra time  China softening hardline stance on ore price  China ready to give ground in iron ore talks - source  Iron ore rate cut 'plan' in the bag

China's mills, who had demanded a cut of as much as 45 percent, are ready to discuss a reduction of between 33 and 40 percent, Caijing magazine reported last week. They are aiming for an agreement by the end of this month and want Rio to consider contracts that run for less than a year, said Tian Zhiping, vice-president of Hebei Iron and Steel Group.

"A compromise could be made in which Chinese mills agree to the same terms as Japan, if miners concede quarterly or semi-annual price revisions," Peter Richardson, Melbourne-based chief metals economist at Morgan Stanley, said in a July 2 report. "Failing this, Chinese mills would have to risk the spot market price."

In fact, suppliers are offering to Chinese steel mills a 76 percent discount from last year's price under last year's contract that is still in place, Beijing Morning Post reported. It makes the prices for the Chinese market equal to the prices agreed by other Asian players.

"The pressure on the Chinese was always on after the Japanese and the South Koreans settled," said Prasad Patkar, who helps manage the equivalent of $930 million at Platypus Asset Management in Sydney. "They seem to be capitulating now that spot prices are firm and idled steel making capacity around the world is being brought on line."

To be sure, cash prices will struggle to move above $80 a ton for a sustained period in the absence of "a major positive surprise from non-Chinese demand, which for the moment remains elusive," Goldman Sachs JBWere Pty analysts Malcolm Southwood and Paul Gray said in a June 30 report.