Backgrounder

Iron ore deal not a big deal

By Zhang Qi (China Daily)
Updated: 2009-08-18 06:52

Chinese negotiators have backed down from a demand for a 45 percent cut in iron ore prices, settling for a 35 percent reduction from Australia's Fortescue Metals Group Ltd (FMG) and asking for the same deal with SA Vale, Billiton BHP Ltd and Rio Tinto Group.

Analysts said the cut was a face-saving gesture after seven months of stalled talks involving miners and the China Iron and Steel Association.

"The FMG agreement won't end the long talks between China and the largest suppliers," said Hu Kai, a Shanghai-based analyst with Umetal Research Institute. "Fortescue is too small to be representative in setting benchmark prices."

FMG's annual production stands at only 50 million tons per year, while China's iron ore imports require more than 50 million tons per month, said Fan Haibo, a senior analyst from Xinda Securities.

"Such a small fraction cannot shelter China from the dominant position enjoyed by the three global giant miners," Fan said.

Fortescue agreed to supply iron ore for all Chinese clients at a unified price, "whether State-owned or private steel companies, large or small", Shan Shanghua, the secretary-general of the iron and steel association, said yesterday during a news conference.

Free on board fine ores will be sold at 94 cents per dry ton unit for the rest of 2009, down 35 percent from the price last year, while lump ores will be sold at 100 cents per dry ton unit, down 50.4 percent, he said.

A dry metric ton unit, or dry ton, has the same mass value, but the material has been dried to decrease the moisture level.

Shan said China will apply this "China mechanism" with Billiton, Vale and Rio, using the FMG prices as a reference point.

Xu Xiangchun, a director of Mysteel Research Institute, questioned the value of the deal.

"Although it sounds like a breakthrough in the protracted talks, will the new mechanism be accepted by other miners?" he wondered.

"Actually, it's unlikely that the three global miners will offer China a better price after the 33 percent cut has been accepted by other countries such as Japan and South Korea," he said.