* Rio, Nippon Steel agree 33 pct fines cut, 45 pct for lump
* Deal shifts pressure onto China mills, seeking deeper cut
* Rio shares edge up, Nippon Steel softer after deal
(Adds POSCO reaction, analyst comment)
By Jonathan Standing
SYDNEY, May 26 Rio Tinto and Nippon Steel
agreed to cut key iron ore prices by a third in this year's
first contract deal, setting a benchmark that China's embattled
mills will almost certainly resist after six years of surging
The long overdue settlement for contracts beginning from
April was in line with levels that were rumoured last week, and
will bring some relief to both miners and mills, which have
been in deadlocked talks as demand for both steel and its main
raw material collapses amid the worst recession since World War
But analysts said miners may find it tougher in
negotiations with Chinese steelmakers like Baosteel
(600019.SS), which have fiercely resisted anything less than a
40 to 50 percent reduction in prices that have roughly
quadrupled since 2002.
"I don't think they will get the same outcome with the
Chinese," said Mark Pervan, head of commodities research at
Australia and New Zealand Banking Group in Melbourne.
"They struck the deal with the Japanese first as they
realise it will be tougher task with the Chinese, which is a
much bigger market -- you could see a further 5-10 percent
added to the cut."
If the Chinese mills break the tradition of following the
first deal it will be yet another crack in the decades-old
system of setting iron ore prices on the basis of annual
negotiations, a process already under threat from growing spot
Rio (RIO.AX) (RIO.L), the world's second-largest producer,
said it had agreed to sell its Pilbara and Yandicoogina fine
ores to No. 2 global steelmaker Nippon Steel Corp (5401.T) at
97 U.S. cents per dry metric tonne unit versus 144.66 cents
last year for the current shipping year, a reduction of 33
Higher-quality lump, for which it charged a premium last
year, will sell for 112 cents a tonne, down nearly 45 percent
from 201.69 cents, a deeper for customers primarily in Japan
and South Korea. Chinese mills mainly buy iron ore fines.
Here is a graphic showing Asian iron ore prices since
BHP Billiton Ltd (BHP.AX) (BLT.L) declined to comment on
its talks, while South Korean steel maker POSCO (005490.KS),
the world's fourth largest, said it was still negotiating with
Rio and had not decided whether it would follow Nippon Steel's
JFE Holdings Inc (5411.T) and Sumitomo Metal Industries Ltd
5405.T also said they had agreed prices with Rio.
Officials at China Iron & Steel Association and Baosteel
could not immediately be reached for comment.
Rio shares turned positive on the news, rising as much as
2.5 percent and helping Australia's benchmark S&P/ASX 200 index
gain 0.8 percent to 3,767. Rio last traded 1.5 percent higher
at A$65.05 and BHP rose 0.5 percent to A$34.03, while Nippon
Steel shares slipped 0.9 percent on the day.
Shares in new producer Fortescue Metals Group (FMG.AX),
which sells all its iron ore to China but has not been involved
in any price negotiations, rose 4.4 percent to A$2.63.
"This is a good start. What's going to be somewhat more
telling is to confirm that the Chinese will follow suit. That's
probably more critical," Fortescue's executive director, Graeme
Rowley, told Reuters.
ANZ's Pervan said the new fines price is equal to $62.50 a
tonne, or $72.50 including a $10 per tonne freight charge from
Western Australia, suggesting that Rio Tinto won a $5 per tonne
premium to the delivered China spot price of $67.50.
The deal ends years of steadily rising iron ore prices,
including the 96 percent increase that Rio Tinto and BHP won
last year for its Pilbara lump ore, as China's double-digit
economic growth fuelled the rapid expansion of its steel
Global steel prices have since more than halved after
hitting record highs above $1,000 a tonne last summer and the
market conditions remain dire, as stimulus packages around the
world have yet to boost real demand and drain excess
Against that backdrop, the Chinese mills have been adamant
that they will accept nothing less than a full reversal of last
year's increase, nearly halving prices to ease the financial
pain of tumbling steel prices.
But their bargaining position may have been undercut by the
dramatic decline in domestic iron ore production, which, by
some estimates, has halved because of the sharp fall in spot
market prices, forcing China to import record volumes of ore
from abroad to help feed steel demand propped up by fiscal
Rio Tinto's iron ore chief executive, Sam Walsh, told a
mining conference in Canberra on Tuesday that demand for ore
from China had been strong in recent weeks, helped by the
closure of high-cost iron ore mines in China.
"That has opened up an opportunity for us and I'm very
pleased to say that for the last six weeks our operations have
been running absolutely flat out," Walsh told reporters on the
sidelines of the conference.
Brazilian miner Vale (VALE5.SA) (VALE.N) has allowed the
Australian miners take the lead in this year's negotiations
after having missed out on the peak of last year's pricing,
settling an early deal with customers at a 71 percent rise.
For a factbox on global iron ore price forecasts,
For a factbox on Asian iron ore prices since 1992,
(Additional reporting by Denny Thomas, Sonali Paul and Bruce
Hextall in Australia, Jonathan Leff in Singapore, Miyoung Kim
in Seoul, Tom Miles in Beijing and Yuko Inoue in Tokyo; Editing
by Clarence Fernandez and Jonathan Leff)