Shock and ore for Baosteel

By Fu Chenghao  |   2008-6-26  |     NEWSPAPER EDITION

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BAOSTEEL Group Corp's latest agreement with Australian miner Rio Tinto Group for this year's iron ore contracts is acceptable for both sides.

The nearly 80-percent price rise for Rio's iron ore fines and 96.5-percent jump for its iron ore lump, which eclipses the 65 to 71-percent increase that China reached with Brazilian miner Vale in February, still makes Australian ore cheaper than Brazil's - when freight costs are taken into account.

Shanghai-based Mysteel.com analyst Jia Liangqun said this should be a win-win result, given that Chinese mills mainly buy fines rather than lump, while Rio also wants to maintain good relations with its largest customer.

"They (Rio) had been demanding a rise of 85 to 95 percent, but the final agreement means a rise of less than 85 percent for China," Jia said. "This is a win-win result after a long round of wrestling between the two sides."

The annual price negotiation between steel makers and the world's ore mining trio, which also includes Australia's BHP Billiton, should have ended before April 1, the start of the fiscal year for which the contracts apply. Baosteel represents major Chinese mills in the price negotiations.

But talks with Rio and BHP had been deadlocked because Australia demanded a freight premium, as its proximity to China reduces shipping costs. BHP hasn't yet settled its contracts.

Australian miners had also threatened to sell some of the contract ore on the pricier spot markets after the end of June under terms of the contracts.

"Rio clearly knows China is its largest consumer, so it's not willing to further fight with Chinese mills in this regard. I think the result came as both parties made a concession," Jia said.

Still, the Baosteel-Rio accord broke the decades-long practice of letting the first agreement between a steel maker and a miner set the benchmark for the rest. Concerns have mounted among domestic industries about how the price talks will develop from next year.

Baosteel said the latest deal came as both parties intended to maintain the traditional pricing mechanism, while Rio said the agreement builds in the valuation premium for its iron ore businesses.

Xinhua news agency said China steel firms should prepare for any uncertainties in future negotiations by monitoring changes in global iron ore demand and supply.

Rio's ore cost about US$134 per ton at Chinese ports including freight and insurance costs, against US$173 per ton for Vale's ore, according to BOC International.

Steel stocks tumbled on Tuesday in response to Monday night's announcement of the Rio price rise, but analysts said that was an overreaction because the increase is smaller than expected and had been factored into steel product prices.

Baoshan Iron & Steel Co, Baosteel's listed arm, rose 5.85 percent to 9.59 yuan (US$1.40).