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Drawn like a magnet to iron ore price negotiations: analysis


By Francis Browne, Julien Hall, Maya Thatcher, Jeb Blount (in Brazil) & Joe Innace


February 16 - This time of year, the news flow from the global iron ore market does not get much better. The posturing. The official statements. The anonymous comments and the attributable ones.


In an attempt to sort through the latest developments, consider the recent story lines -- and backdrops -- swirling around the high-level annual contract pricing negotiations:


  • The Big Three global iron ore miners -- Brazil's Vale and Anglo-Australians BHP Billiton and Rio Tinto -- are seemingly making money hand-over-fist.
  • On the other side, Chinese steel mills -- which produce more than a third of the world's steel, making the country the biggest consumer of iron on the planet--are lamenting leaner profits for 2009, and even losses for several of them.
  • Miners were reportedly this close to a deal for a 40% provisional price hike in 2010-2011 annual contract pricing of iron ore -- and some think an 80% increase is possible compared to 2009-2010. (Listen to related podcast: Deal close for 40% provisional hike in annual iron ore pricing negotiations).
  • Four Rio Tinto executives, including Stern Hu -- last year's lead negotiator for Rio Tinto in the talks -- were formally charged in a Chinese court with bribery and infringing trade secrets, according to China's Xinhua news. They had been arrested and detained since last summer.
  • The China Iron and Steel Association (CISA) is openly criticizing the media for irresponsibility--and some western analysts tend to agree.
  • Four Rio Tinto executives, including Stern Hu -- last year's lead negotiator for Rio Tinto in the talks -- were formally charged in a Chinese court with bribery and infringing trade secrets, according to China's Xinhua news. They had been arrested and detained since last summer.


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Money talks, and miners ask for 40% provisional increase


Vale reported net income February 10 of $5.35 billion for 2009, compared with $13.2 billion the previous year.


Rio Tinto reported a $4.87 billion net profit for last year, up 33% on 2008, attributing the jump to record iron ore sales and a recovery in commodities prices.


BHP Billiton said February 9 that its profit from operations during the half-year that ended December 31, 2009, rose 26.2% to $9.12 billion from $7.22 billion a year earlier.


The China Iron and Steel Association said February 10 the country's 68 largest steel mills posted combined net profits of Yuan 55.4 billion (about $8.1 billion).


The net incomes of just Vale and Rio Tinto combined amounted to $10.2 billion last year. Eight of the 68 mills in China posted losses in 2009.


Miners were reportedly nearing a deal for a 40% "provisional" price hike in the 2010-2011 talks.


According to a mining executive familiar with the annual negotiations, the 40% price increase was discussed with the five biggest Chinese steel mills individually and an agreement was thought to have been reached, the source told Platts exclusively in a meeting the week ended February 12.


When discussed collectively and within the formal framework of the negotiations, however, the mills became reluctant.


The same mining company executive pointed out that seeking a 40% hike was indeed only a provisional arrangement and that if there were an annual price agreement at all, it would have to be a price hike on the order of 80% for the 2010-2011 delivery period.


Still, the mining executive was optimistic that the mills will agree to the 40% uplift in contract pricing within the next few weeks, particularly at those mills with contracts running January to December.


A 40% increase over the 2009-2010 benchmark price means Australian iron ore fines would be $1.358/dry metric ton unit, or $84/dry mt FOB Australia for 62% Fe. (See related chart: Platts spot-market benchmark price: FOB Australia (USD/DMT), Feb. 2009 - Feb. 2010).


From Brazil, this would equate to a new price of $1.258/dmt unit, or $83/dmt FOB Ponta da Madeira for 66% Fe Carajas fines.


Such prices are still well below current spot prices, which February 11 were at $117/dmt FOB Australia and $98.43/dmt FOB Brazil for 62% Fe-content fines, according to Platts' assessments and freight netbacks.


Nonetheless, a 40% hike would represent a return close to 2008-2009 benchmark pricing, the highest on record. (See related chart: Platts spot-market benchmark price: CFR China (USD/DMT), Jun. 2008 - Feb. 2010).


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