There seems to be a very careful dance involving Rio Tinto, Chinalco and the Chinese government, with the Australian government an interested wallflower, at this stage at least.
Yesterday Chinese media reported that the country’s steel industry had rejected last week’s 33%-47% cut in iron ore prices that Rio has reached with steelmakers in Japan and South Korea.
Beijing reports said “These prices do not reflect a mutually beneficial, win-win relationship for steelmakers and iron ore suppliers,” the China Iron and Steel Association said in a statement posted on its website. “Cisa therefore cannot accept these prices and will not follow them".
The Chinese mills want price cuts of 45% to 50% or more for their favourite iron ore type, so-called fines, which are now 33% cheaper under the new Rio deal. Rio cut the price of lump ore by 47%: it’s the type of ore favoured by the Japanese mills. Chinese mills want parity with Japanese mills for their favoured ore type.
Individual Chinese steel companies last week revealed their dissatisfaction with the Rio prices in its deals with the Japan and South Korea steel groups.
Chinese steel companies have been buying record amounts of iron ore on the spot market (they imported 57 million tonnes in April, a record after importing a record 52 million tonnes in March).
Cisa said Rio Tinto’s price cuts “do not objectively reflect” conditions in the international iron ore market, and would “result in overall losses among China’s steelmakers”.
It’s understood that Cisa has given Vale of Brazil, Rio and BHP Billiton, the three global iron ore giants just four weeks to close an agreement on prices for 2009-10.
If there’s no agreement, prices paid would be determined by the spot market rather than the annually settled prices of the so-called benchmark system.
The miners have warned China that they will not settle benchmark prices below spot prices – which would happen if they signed up to Beijing’s request for a cut of up to 50% in contract prices.
According to industry reports, the big miners have told the Chinese steelmakers that they would rather move iron ore transactions into the spot market where prices for late this year are pushing above the settlement level for Rio’s deals in Japan and South Korea.
If this was to happen, Chinese steel mills would lose the certainty of contract pricing and guaranteed tonnages. That might be OK now, but when conditions eventually improve, it will leave them hostage to world prices and demand.
The decision to push for bigger discounts than offered has come with Chinese government approval as it controls all the steel groups and the Association.
It could be a sign that something has gone wrong in the Chinalco-Rio deal and the government no longer sees any need to play nice with Australia.
But it could also be a game of bluff with the Chinese government telling the steel mills to play tough on pricing with Rio while the Australian government moves towards the approval or extends the FIRB deadline that is due this month.
That way it would be clear to Australians that China doesn’t control Rio, even with Chinalco holding the single biggest holding.
And then yesterday in Australia Rio and Chinalco announced an extension of the deadline by which Chinalco has to confirm its part in the funding of the Yarwun 2 alumina refinery expansion in Queensland.
"Rio Tinto advises that it has agreed with Chinalco to extend, from 31 May 2009 to 15 June 2009, the deadline by which Chinalco must confirm its participation in funding the Yarwun 2 alumina refinery expansion.
"The Yarwun 2 expansion was approved in July 2007 and construction is now 29 per cent complete.
"The election is required to be made under clause 7.4 of the Co-operation and Implementation Agreement.
“The extension has been requested by Chinalco to allow it to complete its project evaluation and approvals processes," Rio told the ASX
Work on the expansion has been put on hold because of the global downturn in demand for aluminium and alumina.
It’s the second time Chinalco has refused to agree to the financing of the stalled project.
It is now clearly waiting to see what the Federal Government will do.
The deadline is close to the deadline for the Foreign Investment review Board and Federal Treasurer, Wayne Swan to give an opinion/decision on Chinalco’s plan to take an 18% stake in Rio (effectively doubling it) in exchange for a total of $US19.5 billion.
Chinalco will take a 50% stake in Yarwun as part of its deal to lift its stake in Rio
As well as that shareholding, Chinalco will take 15% stakes in Hamersley ‘s iron ore business in WA, the Weipa bauxite mine in Queensland and the Escondida copper mine in Chile: all are among the best assets for their minerals in the world.,
Rio shares rose 2.7% or $1.79 to $66.33, BHP shares rose more than 3%, or $1.08 to $35.74.
Meanwhile, the Reserve Bank said yesterday that preliminary estimates for May indicate that the index fell by 3.5% (on a monthly average basis) in Special drawing Rights, following a fall of 12.8% (revised) in April.
The largest contributors to the fall in May were decreases in the estimated prices of coking coal, iron ore and steaming coal.
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