China set to pounce on iron ore talks

Reuters | Fri, 11 Dec 2009 11:26
[miningmx.com] -- FALLING iron ore spot prices and shipments into China could signal a push by the world's biggest buyer of the steel-making raw material to position itself for an early settlement to 2010 contract talks.

But with the spot market still some 30% above 2009 contracts on a freight-adjusted basis and the global economy on the mend, miners are in a strong position ahead of what are often acrimonious and drawn-out contract talks.

Delays in settling 2009 term contracts - which, formally at least, are still under discussion, but in practice are the same as the 33% cut won by South Korean and Japanese steelmakers - cost chief negotiator China Iron and Steel Association a huge amount of bargaining power as demand revived and the country's growth remained strong.

"Everyone thought CISA was being cleverer than they actually were," a Sydney-based iron ore trading source said. "They should have settled early last year before things recovered. And I think they will have learned from that lesson."

The seaborne iron ore trade is a high stakes business worth more than $80bn a year, dominated by Brazil's Vale and the big Anglo-Australians Rio Tinto and BHP Billiton on the mining side and China, the world's biggest iron ore consumer, on the other.

Shipments slow, prices fall

Spot iron ore prices have fallen 6.5% from three-month highs struck in late November, but forecasts are still for miners to win hefty price hikes of between 10% and 30% next year as steel demand rises with economic growth.

Iron ore prices in China have retreated to $98.10 this week from $104.6, price data from the Steel Index shows.

"A give-back in the spot market is not surprising, but these prices still represent a 30% rise on a freight-equalised basis. Chinese port stocks are declining and that may have created some softness," ANZ's senior commodities analyst Mark Pervan said.

"I think CISA may want to strike early and that also might be a reason why the market is softening - the Chinese may be trying to put pressure on prices now to win a more favourable settlement."

China's steelmakers could be scaling back spot purchases and instead relying on stockpiles as part of a scheme to bolster China's bargaining position.

Between September 11 and November 20, the latest data available, Chinese port stocks fell 5 million tonnes to 68.87 million tonnes, around five percent of monthly consumption.

Certainly data on iron ore fixtures shows a slowdown in vessels bound for China.

Vessel bookings from Australia, the biggest iron ore seller to China, fell by more than half in November, to 26, from 56 in October, data specialist AXSMarine says.

The number of bookings from China's other main supplier, Brazil, also fell last month, and while the ASX data only captures a portion of the trade, it suggests a slowdown in spot purchases after a surge in September.

"It certainly looks like we are seeing a reduction in China's spot orders. It makes sense that they might try to push down prices as we get closer to talks," an iron ore specialist in Hong Kong said.

"Nonetheless it's pretty much a seller's market and I don't think they will be able to do anything to avoid a 20% price rise for the annual contract." Spot's bigger role

The failure to resolve annual price talks in 2009 may also mean spot prices play the pivotal role in the 2010 negotiations as the starting point for discussions rather than the previous year's settlement.

"What will they use a basis for discussions? There are so many starting points - the price agreed with the Japenese, where the Chinese think the right price for this year - who knows! This means spot pricing will play a bigger part than ever as s foundation for talks," a Singapore-based commodities trader said.

Lead mining negotiators in Australia and Brazil refuse to discuss details of their talks until they are wrapped up.

They should have settled early last year before things recovered. And I think they will have learned from that lesson

This year, Nomura expects contract iron ore prices to rise 30%, followed by another 10% hike next year, and predicts a supply deficit will emerge in 2010 because of strong steel production growth in China.

That is higher than the hike of roughly 20% RBC Capital Markets sees in 2010/2011 before a price rollover in 2011/2012.

"We're detecting strong demand for iron ore going forward and no real signs that will change," said John Parker, managing director of Lincoln Minerals, which owns iron ore deposits in Australia.