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Iron ore price negotiations - Chances of stalemate

Interfax-China reported that the volatile iron ore market and the deadlock at contract iron ore talks is likely to result in there being no benchmark prices set for 2009.

Mr Jia Liangqun a senior industry analyst with Mysteel Information said "The iron ore market has been volatile since the end of 2007 and price talks between miners and steel mills have become increasingly difficult as neither side is willing to accept a benchmark price that may be too low or too high for a whole year. He said that disagreements have prolonged the talks and realistically, we could end up without iron ore benchmark prices this year."

Mr Jia said "Rio Tinto said it may abandon negotiations if a long term price agreement is not reached by June 30th and although BHP Billiton has been quiet recently, it has been supporting the idea of spot sales for a long time. Meanwhile, Vale has said it would not finalize a price until the Australian miners close a deal first. On the other side of the negotiating table, steel mills in China, which is the world''s largest iron ore consumer, have said they will not accept any cut less than 40 percent in benchmark prices and refuse to budge."

In regard to whether Rio is aiming for a settlement before the end of June, Mr Jia said that the long-term iron ore pricing scheme is breaking down, and Rio does not really care whether a long-term price is settled or not. As the market has changed, both buyers and sellers are expected to eventually adopt a spot sales system, such as the iron ore index-based pricing scheme.

Mr Wang Sujuan another industry analyst with Mysteel said that Indian iron ore prices which are representative of spot ore prices, have recently stabilized and may have bottomed out. As such, Australian and Brazilian miners are unlikely to accept and observe a 40% reduction in contract prices for a whole year because prices would equal the current price level of Indian iron ore. He said that "If there is no long-term benchmark price in 2009, both miners and steel mills will be equally exposed to market volatility risks."

The Australian Financial Review said on May 5, citing Mr Sam Walsh, the head of Rio Tinto''s iron ore sector that Rio would walk away from contracts if a price agreement is not reached by June 30th.

May 7, 2009 11:12
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