Deal paves the way for 'China price' separate from rate set by big three

Wuhan Iron & Steel Group, China's third-biggest steelmaker, will buy iron ore from Venezuela at a long-term contract price this year, paving the way for a "China Price" separate from what the big three global miners are charging.

The price of iron ore from Corp Venezolana de Guayana (CVG) for 2010 will be $20 per ton lower than what Vale is charging in the third quarter, saving at least 400 million yuan ($59 million) for Wuhan Steel this year, the company said in a statement on its website on Wednesday.

"This is the first-ever contract under the 'China Price' and we hope to apply this to other countries to diversify our resource supplies," said Bai Fang, Wuhan Steel's spokesman.

"The iron ore is 65 percent ore content, and we expect this year's imports from CVG will surpass last year," he said.

Wuhan Steel imported 480,000 tons of iron ore from Venezuela in 2009.

The world's top three miners - Vale, Rio Tinto and BHP Billiton - broke the 40-year tradition of selling iron ore on an annual contract basis this year and opted for a quarterly pricing system.

However, Chinese steel mills prefer to use long-term contracts for iron ore to secure raw material supplies and stabilize costs.

Wuhan Steel and CVG sealed a supply contract in October 2009 to break the monopoly of the big three.

Last October, Wuhan Steel agreed to buy more than 40 million tons of iron ore under a seven-year contract with the Venezuelan company.

The average cost of ore arriving at Wuhan Steel's plants was 668 yuan ($99) per dry ton in 2009, lower than the spot market price, Wuhan Steel said.

CVG, Venezuela's only iron ore producer, had a production capacity of 23 million tons last year.

The South American nation has 4.18 billion tons of proven iron ore reserves, Wuhan Steel said earlier in a statement.

Wuhan Steel has been seeking to invest in more overseas iron ore assets to cut reliance on expensive imports.

"We aim to be self-sufficient in iron ore supplies in three to five years," Deng Qilin, chairman of Wuhan Steel, said in March.

The Wuhan-based company acquired a 21.52 percent stake in Brazilian iron ore mining company, MMX Mineracao e Metalicos SA, for $400 million last year.

The company also received approval from the Australian government for a A$271 million ($249 million) investment in Centrex Metals Ltd in November, and for a 60 percent stake in the iron ore rights of five Centrex projects in South Australia that could contain up to 2 billion tons of resources.

China Daily

(China Daily 07/22/2010 page14)