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China mills seek 40 pct cut in iron ore prices

SHANGHAI, Jan 9 (Reuters) - Chinese steel firms on Friday joined Japanese counterparts in demanding price cuts of around 40 percent for term iron in 2009, as mills look to cut costs amid faltering demand and huge cutbacks in output.

Asian steelmakers are calling for the first cut in annual iron ore prices in seven years as they struggle with steel prices that have tumbled since late last year, as the global economy stagnates in the grip of a worsening financial crisis.

"The bottom line for Chinese steel mills is for iron ore prices to drop to the levels between 2007 and 2008, meaning Brazilian miners must cut ... by at least 39 percent and their Australian counterparts by at least 45 percent," the Shanghai Securities News newspaper quoted unnamed industry sources as saying.

The China Iron and Steel Association declined to comment, while analysts predicted that, while ore prices seemed certain to drop sharply, steelmakers could struggle to force through cuts of that magnitude.

Asian steelmakers agreed to close to a doubling of iron ore prices for the year to the end of March but are now extending production cuts amid few signs of a recovery in demand.

On Tuesday Japan"s JFE Holdings, the world"s No. 3 steelmaker, said it wanted iron ore prices in the 2009/2010 business year to fall at least back to 2007/08 levels.

Global steel output fell 19 percent in November, the World Steel Association said. It and may fall further in December and January as South Korea"s POSCO considers more cuts and JFE scales back further by becoming the first Japanese firm to shut a blast furnace.

MINI RALLY

Iron ore major BHP Billiton and Rio Tinto declined to comment on the Chinese report. Spokesmen for both groups said it was company policy not to discuss price negotiations.

Rio Tinto shares in London fell 2.2 percent to 1,692 pence while BHP lost 0.15 percent to 1,290 pence by 1042 GMT, compared to a 2.76 percent loss in the UK mining index, which shed 56 percent last year.

Iron ore price negotiations informally began late last year but have stepped up, with China"s steel mills likely to push for an early settlement.

"It"s early days and they"re probably being opportunistic on the back of the iron ore price weakness pre-Christmas," said James Wilson, an analyst at DJ Carmichael.

"They"re trying to lock in prices while they can but I think they will find they won"t be able to do that. I don"t see a 45 percent reduction happening."

Analyst Andrew Keen at Bernstein Research in London agreed the fall in iron ore prices would be less than expected.

"We believe contract prices are likely to surprise on the upside ... We are expecting a 35 percent decline in Australian iron ore fines and believe that the market is pricing in a decline approaching 50 percent," he said in a note this week.

Spot iron ore prices plunged 70 percent from highs of nearly $200 per tonne last February to $60 a tonne in October, but have since recovered to about $80 a tonne.

The recovery comes as production from China, the world"s biggest steel producing country, crept up in recent months from more than two-year lows in November as some mills raised operating rates to ride a mini rally in steel prices.

Asian steel prices rose 13 percent from a two-year low in late November, as coordinated output cuts globally tightened market conditions and forced buyers with low inventories to accept price hikes by some producers.

But the tentative recovery in prices may end soon as key buyers, such as automakers, rein in production.

"So far, what is absent is a significant recovery in end-use steel consumption," said Jim Lennon at Macquarie in a note to clients.

Goldman Sachs JBWere analyst Malcolm Southwood in a research report this week forecast a 30 percent fall in steel prices.

 

Jan 12, 2009 13:48
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