Will this deal hold?
Nippon Steel, Japan’s biggest steelmaker has seemingly supplanted the Chinese steel industry and reached agreement with Rio Tinto on a new 2009-10 iron ore price that calls for a 33% cut.
The new contract pricing arrangements was revealed in a statement to the ASX yesterday.
It is the first price cut for iron ore in seven years and follows sharper cuts in coking coal prices with suppliers.
But it isn’t as bad as earlier estimates of cuts up to 40%-60% averaged across all iron ore types.
Nippon Steel (also the world’s second-largest steelmaker) agreed to pay Rio 97 USc a dry metric ton unit, or about $US61 a ton, for its benchmark product in the contract year started on April 1.
That compares with last year’s record of 144.66 USc for Rio’s Pilbara Blend fines.
“We believe this settlement is a realistic outcome for both parties, one that reflects the global market for iron ore and the current challenging market conditions facing our customers,” Sam Walsh, head of Rio’s iron ore business, said in the statement.
The Nippon deal was followed by similar agreements with other Japanese mills.
Rio’s shares rose $1.36 to $A65.46 in Australia yesterday. BHP Billion shares were up 42c at $34.29
Nippon agreed to pay 112 USc per dry metric ton unit for Rio’s premium Pilbara Lump product, 44% lower than last year’s contract price.
Japanese mills use more lump ore than fines, hence the bigger price cut. Chinese mills use more fines.
The price cuts mean the 2009-10 iron ore prices for the Japanese steel industry will be lower (and for steel industries in South Korea and Taiwan and European markets) than the record levels set in 2008-09, but they will still be the second highest on record.
Rio had struck a provisional 20% price cut from April 1 with some producers. This will now be rolled over into the new deal which will be the benchmark for the rest of the industry.
But will the Chinese steel industry agree?
For the first time in several years their market supremacy has been by-passed; or so it seems.
Some Chinese mills had been looking for larger price cuts than those won by NipponSteel, but much of that represented bravado.
But the Japanese have made a shrewd move in reaching this agreement: although depressed, with no prospect of an immediate upturn and budgeting for a loss for the next year, it’s could be seen as a pricing move that attempts to reposition the sector in the global steel industry.
Reaction from Chinese companies?
I reckon most will cop it because they are state owned and the Chinese Government won’t want to ruin or damage Chinalco’s attempt to take an 18% stake in Rio, plus interests in iron ore, aluminium and copper.
But there will be pressure to cut deeper (some want prices cut in half).
Some Chinese mills will no doubt leak to western media, but in the end, the certainty of a contract, versus the spot market will prevail.
Spot prices are rising: some analysts say that contracts being signed now on the spot market imply that prices could be above the new NipponSteel contract price with Rio by the end of the year.
China imported 444 million tonnes of iron ore in 2008 and 57 million in April of this year alone.
That will ensure that China will get a deal for it, but will the Chinalco deal prove more important than a price cut?
That remains the major objective and it’s probably why the Chinese allowed NipponSteel to do the front running this time.
If the Chinese steel industry had won a bigger cut and Rio had agreed to it that would have increased the opposition in Australia to the Chinalco deal.
Chinese steel production has edged higher so far this year (but eased a bit in April). Iron ore exports are at record levels (see below).
For Australia, the deal means the mooted downturn in export earning from iron ore and coking coal will now happen, with much of the impact to be felt in the 2009-10 financial year from July 1.
Trade figures for the June quarter will be restated and won’t show the full impact until August/September.
In March ABARE saw "Large falls in iron ore and metallurgical coal contract prices are expected to lead to large declines in export earnings for these commodities in 2009-10.
"For iron ore, export earnings in 2009-10 are forecast to decline by around 22 per cent to $27 billion dollars (2008-09 dollars).
"Metallurgical coal export earnings are expected to decline even sharper. Metallurgical coal contract prices are expected to decline by more than iron ore contract prices in percentage terms and metallurgical coal export volumes are also forecast to fall (while iron ore volumes are forecast to rise).
"Consequently, metallurgical coal export earnings are forecast to decline by around 44 per cent to $20 billion (2008-09 dollars) in 2009-10.
"Export earnings for iron ore and metallurgical coal are expected to decline for the next few years before picking up toward the end of the outlook period.
“Contributing to the pick up in earnings will be ongoing growth in export volumes and an expected recovery in prices from 2012 onward."
With Coking coal prices down to around $US125-$US128 a tonne from around $US300 a tonne and thermal coal down from around $US125 a tonne to $US75 a tonne, the impact on our national income will be substantial.
This is what Merrill Lynch economists and company analy
