Brinkmanship increases over iron ore price negotiations

Iron ore producers have offered Chinese steel mills a 50 per cent hike in the price of the commodity during annual negotiations, reports in the state-owned Chinese media suggested yesterday.

The English-language China Daily, which is controlled by the ruling communist party, quoted officials from Chinese steelmaker Baosteel saying that it would wait to see how talks between Japanese mills and miners such as BHP Billiton and Rio Tinto developed, before committing to any offer. The reports went on to say that the producers' "tough stance" would put further pressure on the sagging bottom lines of Chinese steel mills.

Industry analysts, however, have suggested that the reports, which accused the mining groups of sabre rattling, could be part of the brinkmanship that usually accompanies the negotiations. A number of experts have suggested that a 50 per cent jump in the price of iron ore is in fact at the bottom end of expectations.

Jason Fairclough, an analyst at Merrill Lynch, has said prices could jump by as much as 90 per cent. Spot, or market, prices have increased by 50 per cent since last September alone, as demand has increased following a period of destocking during the economic downturn.

Sources at POSCO, South Korea's leading steel mill, were quoted by Reuters saying that they have not yet received any offer from the miners.

Historically, benchmark iron ore prices are set each year after lengthy negotiations between the world's major producers – BHP, Rio Tinto and Brazil's Vale – and a number of leading Asian steel mills. By convention, once one deal is agreed, other parties accept the price for 12 months.

Last year, Vale struck a deal with a Japanese steel mill to increase prices by 33 per cent. But the accord was rejected by the China Iron and Steel Association, which insisted on a 45 per cent discount. After no agreement was reached, China bought iron ore from the spot market, providing a fillip for the mining companies as prices then steadily increased.

The spot price had fallen to less than $150 a tonne in 2008, from highs of more than $400. By contrast, the contracted price was set at $62 a tonne last year.

BHP Billiton and Rio Tinto refused to comment yesterday. Neither company has even acknowledged that talks have started.

This year's talks have been complicated by the two companies' pressing ahead with an iron ore joint venture in Australia and the arrest and indictment in China of four Rio Tinto employees, including an Australian national, on suspicion of spying.

Last month, Marius Kloppers, BHP Billiton's chief executive, said that the spot price should form the basis of the negotiations and that it is now, "very close to 100 per cent above where the benchmark price is today".

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