The 2010 iron ore contract talks are settling down to the tough stuff, with Chinese media leaks and reports claiming that Rio Tinto and Vale of Brazil, want steelmakers in Asia to pay 50% more, and BHP Billiton asking the mills to lift their spot purchases.
The claims were detailed on the China Daily website yesterday. The companies have made the offers to Japanese steel mills.
The China Daily said the lead Chinese negotiator, Baosteel Group Corp, will wait to see how Japanese and South Korean steelmakers react to the price offers before deciding on a stance (which it will reach after talking to the government).
Bloomberg reported this week that the Japanese investment house Nomura says Vale, Rio and BHP, the three biggest iron ore producers, may win price rises of up top 70% in the talks for the 2010 contract year starting April 1.
Other brokers in Australia last night were talking about 80% price rises.
That would take contract prices, presently $US61 a tonne, close to the current spot prices of over $US130 a tonne (no freight in either price). The freight component of the spot price is around $US10 a tonne ex Port Headland and Dampier for China).
China Daily said that Rio wants a 50% increase on the benchmark price, which was a cut of 33% on average for lump ore and fines with the Japanese mills.
BHP wants the mills to take more at spot prices and Vale was a 50% increase based on the difference between the spot price and the benchmark price.
Current financial year shipments into China are priced at either the benchmark price established with the Japanese mills (China wanted a 45% price cut, but the big three refused) or spot prices.
Chinese iron ore purchases jumped sharply in the last half of 2009 as steel production and demand rose. Over all of 2009, China lifted iron ore imports 42% to 628 million tonnes.
Chinese steel mills are forecasting an 8.6% increase in output this year to 621.5 million tonnes.
Chinese iron ore exports fell to around 46 million tonnes in January after a jump in November and December ahead of the winter and Chinese New Year in February.
That forced the Chinese mills to pay a lot more for ore because the extra tonnage was priced at spot levels which rose to over $US100 a tonne.
This week the spot price hit around $US130 a tonne (or $US140 a tonne including freight).
That’s more than double the current spot price.
In its first estimate for 2010 for commodity prices and exports this week, ABARE said that "export earnings from iron ore are forecast to decline by 15 per cent to $29 billion.
"Like metallurgical coal, this is primarily a reflection of a sharp decline in contract prices in JFY 2009, partially offset by a 21 per cent increase in export volumes.
"Export earnings in 2010-11 are forecast to increase by 21 per cent to $35 billion, which reflects assumed higher contract prices for JFY 2010."
Hard coking coal (the best quality) could jump from around $US125 a tonne to close to $US200 a tonne in the new contracts because of a continuing shortage of coal in Asian markets at the moment.
"Over the medium term, the value of iron ore exports is projected to increase by 4 per cent a year, to reach $43 billion (2009-10 dollars) in 2014-15.
"The main driver underpinning this increase is higher export volumes, while real contract prices are assumed to ease toward the end of the outlook period."
ABARE said Australian exports of iron ore are projected to increase at an average annual rate of 7% over the outlook period to 2015.
By then "Australia’s iron ore exports are projected to account for 42 per cent of world trade, as several large projects scheduled for completion during the period are expected to meet the projected demand growth.
"In addition to BHP Billiton’s Rapid Growth Project 4 (additional 26 million tonne annual capacity) completed in late 2009, several large projects are scheduled for completion in 2010.
"Rio Tinto is scheduled to complete the Mesa A (25 million tonne capacity) and Hamersley Iron Brockman 4 (22 million tonnes) projects, CITIC Pacific Mining is scheduled to complete the Sino Iron project (28 million tonnes), and Fortescue Metals Group is scheduled to complete the Christmas Creek project (16 million tonnes).
"Furthermore, completion of BHP Billiton’s Rapid Growth Project 5 (45 million tonnes) is scheduled for 2011.
"Although the full capacity of these projects is not expected to be utilised until the second half of the outlook period, the combined effect of these projects will support export growth in the short and medium term."
BHP and Rio shares had a solid day yesterday. BHP finished up 61 cents at $42.28, and Rio shares rose 53c to $74.40.
