Rio Tinto costs deal a share dampener

By Fu Chenghao  |   2008-6-25  |     NEWSPAPER EDITION

CHINESE steel stocks fell yesterday in a rising market after Baosteel Group Corp agreed to a price increase of at least 79.88 percent in this year's iron ore term contracts with miner Rio Tinto.

But the sector regained some position after some research reports said the increase was slightly smaller than expected.

Shanghai-based Baosteel, which negotiated the prices on behalf of Chinese mills, settled the 2008 prices with Rio on Monday, agreeing to pay 79.88 percent more for the Australian miner's Pilbara blend fines and Yandicoogina fines, and 96.5 percent more for its Pilbara blend lump.

This represents a weighted average rise of 85 percent based on Rio's production split with fines accounting for about three quarters of output and lump iron ore the remainder.

"Chinese mills mainly import fines, so the price increase for fines could more reflect the true cost rise for China," a Citic Securities report said. "That's lower than the market expectation of 85 to 95 percent."

Baosteel in February agreed with Brazilian miner Vale for a rise of 65 to 71 percent. Australian miners, which also include BHP Billiton, are demanding bigger increases to reflect their lower freight cost from Australia, than from Brazil, to China.

The contacts apply for the fiscal year starting April 1. Citic said Australian ore is still cheaper than Brazilian ore considering the freight rates.

Domestic listed steel companies now have low price-to-earnings ratios, Citic added.

China International Capital Corp analyst Luo Wei said Rio's prices would add 454 yuan (US$66) per ton to steel makers' costs.

"But Chinese steel prices on spot markets have risen 1,000 to 1,800 yuan per ton."

Baosteel's listed unit, Baoshan Iron & Steel Co, fell 7,83 percent to 9.06 yuan, after tumbling as much as 10 percent.

The firm's board secretary said they were evaluating the impact of the increased costs, and she said it could be limited. Wuhan Iron & Steel Co dropped as much as 4.8 percent, before closing 0.49 percent down at 10.14 yuan.