March 30, 2010 / 1:28 AM / 9 years ago

UPDATE 5-Vale, Nippon agree 90 pct iron price hike-source

 * Nippon, Vale agree to $100-$110/tonne for Apr-Jun-source
 * Deal creates quarterly deal, boost move to spot pricing
 * May help set floor for talks with Chinese  (Changes dateline, recasts with source confirmation)
 By Brian Ellsworth and Yuko Inoue
 RIO DE JANEIRO/TOKYO March 30 (Reuters) - Brazilian mining giant Vale has reached tentative quarterly iron ore price deals with Asian steel companies that would boost prices by about 90 percent, sources with knowledge of the talks said.
 The move could mark the first quarterly pricing deal for Vale VALE5.SA(VALE.N), the world's top iron ore producer, which for years defended the decades-old benchmark system but recently said it was adopting more flexible marketing.
 Vale and Nippon Steel, Japan's biggest steel producer and the world's second largest, have reached a basic agreement to pay $100-$110 per tonne of iron ore in the April-June quarter, a source told Reuters. Nippon Steel declined to comment.
 That would also mean a roughly 90 percent price hike for South Korea's Posco (005490.KS), which negotiates jointly with Nippon Steel.
 The near doubling in negotiated iron ore prices would set an important benchmark for purchases by China, analysts said, and points towards sharply higher steel prices globally for a range of industries including auto manufacturing and construction.
 The Nikkei newspaper reported earlier on Tuesday that Nippon Steel and Vale had a provisional agreement for $105 a tonne, but that negotiations would continue towards a final deal by the end of next month, to be applied retroactively to April 1.
 "If that's the case, it's excellent, even though the market was already expecting $100 to $110. This will strongly increase revenues," said Pedro Galdi, an analyst with SLW Corretora.
 A Vale spokeswoman said the firm would not comment on the Nikkei report.
 Big miners have been pushing for a big price hike to reflect a doubling in the spot iron ore price since September.
 Sumitomo Metal, Japan's No. 3 steelmaker, has also reached a tentative deal to pay 90 percent more for iron ore, another source with knowledge of its talks with Vale said. A spokesman for JFE Holdings (5411.T), Japan's second-largest steelmaker, said it was still in negotiations and had not yet reached a deal.
 The world's top three miners, Vale and Anglo-Australians BHP Billiton (BHP.AX) and Rio Tinto (RIO.AX) are pushing to change the rigid benchmark system into a derivative-driven system similar to other global commodities such as oil.
 Some steel mills have resisted the call to move towards spot pricing, particularly in Europe. But the acceptance by relatively conservative steel mills such as Nippon and Posco, shows the growing strength of that trend.
 "The chance of returning to an annual benchmark system for iron ore is very slim, at least for now, because of the tight market conditions," a Japanese steel industry source with knowledge of the talks said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^  Graphic suite on iron ore:  More coverage of iron ore pricing:         [ID:nSGE62B0DU]  ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 "The long-term contract worked for 90 years very well for both sides, for both the client and the miner," Vale CEO Roger Agnelli told reporters in Sao Paulo, without commenting on whether or not Vale had closed contracts with steelmakers.
 "I think that model that we are proposing and talking about with clients, of quarterly averages, is helpful for us to be able to complete our investment projects."
 Analysts say Chinese clients began buying on the spot market when prices fell below benchmark after the global financial crisis broke out but insisted miners honor the benchmark as spot prices soared toward the current level.
 "Last year when we thought we had a contract, most of our clients just looked at us and said 'Contract? What contract?'" Agnelli said.
 Vale has for months insisted that benchmark prices informally agreed upon last year no longer reflect the reality of supply and demand.
 Mills argue steel prices have not recovered sufficiently and demand is too weak to pass on to clients their increased costs of iron ore and coking coal.
 Vale shares were up 1.77 percent at 49.41 reais on the Sao Paulo stock exchange, while American Depository Shares in New York were up 3.93 percent to $32.00.
 An acceptance of the aggressive price-hike by relatively conservative Asian steel mills suggests that price may become a baseline for purchases of iron ore by China.
 "We also anticipate that Chinese iron ore prices will settle at least as high, if not higher than other Asian players," said consulting group Steel Market Intelligence in a research note.
 "We continue to believe that China's main assertion, that as the largest buyer of iron ore they should be paying a lower price, is flawed."
 It added China will likely pay a premium for buying iron ore given the perceived political risks of doing business there.
 A Shanghai court on Monday sentenced four Rio Tinto executives to prison terms of seven to 14 years on charges of accepting bribes and stealing commercial secrets, ending a saga that began in the middle of tense 2009 iron benchmark talks and led to those talks unraveling without a formal agreement. [ID:nSGE62S0CI]
 China's rapid economic growth, coupled with the financial crisis, upended the iron ore business by making Beijing the most powerful buyer -- letting its quasi-state steel giants and dozens of importers overturn established market protocol.  (Additional reporting by Denise Luna in Rio De Janeiro and Anand Basu in Bangalore)  (Editing by Rene Pastor)       

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