Iron ore price deal with Japan leaves China cold
May 27, 2009
By Miyoung Kim Seoul
A cut in iron ore prices by a third agreed by the world's second-largest mining house and mill may have the opposite effect on steel product prices, buoyed by the removal of cost uncertainty and the reluctance of Chinese peers to accept the agreement.
Rio Tinto and its Japanese customers agreed to cut iron ore fines by 33 percent and lumps by 45 percent, the first price cut after six years of gains during which prices rose nearly fourfold, and broadly in line with most expectations.
The long overdue deal after months of fraught negotiations may allow the world's second-largest mill, Nippon Steel, and its peers to hold the line against further steel product price cuts with major customers such as Toyota Motor, supporting margins in one of the industries hardest hit by the recession.
At the same time, Chinese mills, which are holding out for a cut of at least 40 percent and facing heavy pressure from the government to rein in output, may curb production to boost steel prices and to win a steeper cut in iron ore negotiations.
"Steel prices have bottomed out and the iron ore deal will take some pressure off steel makers to cut prices further," said Kim Hyun-tae, a Hyundai Securities analyst. "But prices won't be able to stage a strong recovery, as it would take some time for overall demand to fully recover."
Fearing that mining houses might win a deal closer to their proposed 20 percent cut, analysts had expected Nippon Steel to make another price reduction of about ¥5 000 (R440) a ton pending the result of iron ore negotiations, and Posco to slash prices again in the third quarter to reflect falling raw material prices.
Nippon and Toyota agreed last month to a smaller-than-expected cut of ¥5 000 a ton, while Posco cut its domestic steel prices by up to 20 percent this month, the biggest such move it has made.
The Rio Tinto-Nippon deal "removes one of the overhangs on steel prices and gives cost support… The less-than-expected iron ore price drop would require a higher steel price rebound to be passed on," said Song Shen, a Goldman Sachs analyst.
Chinese steel prices have rebounded back above $500 (R4 100) a ton - still half last year's peak - after falling steadily to a five-month low last month on hopes that Beijing's nearly $600 billion stimulus plan would help pull the world out of recession.
But analysts caution that hard evidence of that hoped-for end user demand remains scarce, and any price recovery will depend on whether China shows disciplined output.
"The deal removed the last bit of uncertainty that has haunted steel makers, but steel market recovery depends heavily on China - whether they continue to produce more steel and put pressure on prices again," said GO Kim, a Samsung Securities analyst.
Spurred by a clearer cost structure and increasing prospects of stabilising steel prices, Chinese mills, which were deep in the red because of crumbling steel prices, could rush to raise output again to cut losses if prices rebound, said analysts.
China is already the sole major global producer keeping output steady this year, when production outside the country tumbled about 36 percent between January and last month.
"Now we have to see whether the Chinese steel association can hold the fort or not. For steel makers, this cut (of 33 percent) will increase their costs and bring up steel prices. It might also push up spot iron ore prices," said a senior official at a Chinese state steel maker. - Reuters
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