China baulks at iron ore price rise

Chinese steel authorities attacked attempts by iron ore miners to increase annual prices by as much as 90 per cent yesterday, echoing earlier comments made by a European trade body, which said that groups such as Rio Tinto and BHP Billiton were threatening the economic recovery.

The China Iron and Steel Association (Cisa) said that it shared Eurofer's "outrage" that groups such as Rio, BHP and Brazil's Vale were calling for a 80 to 90 per cent increase during price negotiations.

"On the afternoon of 11 March Eurofer made a statement on its website strongly opposing the intention of iron ore producers to raise prices by 80-90 per cent," Cisa said. "The China Iron and Steel Association expresses its approval and support for this statement."

Last week Eurofer said it was "outraged" by the miners' attempts to "massively increase" iron ore prices, adding that "this will reduce demand for many price-sensitive products and therefore slow economic recovery or even push economies back into recession".

Rio Tinto and BHP Billiton refused to comment yesterday. Cisa's statement follows its calls for the issue to be discussed at a political level.

Benchmark prices are set annually after talks between the miners and individual steel mills. Last year, Chinese mills refused to accept a 33 per cent increase agreed by Korean and Japanese mills, insisting on a 45 to 50 per cent discount. No deal was ever agreed.

On 10 February, Marius Kloppers, BHP's chief executive, said that the iron ore 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". Cisa said at the end of last year that a 20 per cent increase would be more appropriate.

Cisa's comments will sour what had been a good day for Rio Tinto after tensions with its biggest shareholder, Aluminium Corp of China (Chinalco), eased when reports emerged that the two are close to agreeing a deal on a $12bn iron ore joint venture in Guinea, West Africa.

The relationship between Rio Tinto and Chinalco, which holds a 9.3 per cent stake in the group, have been severely strained since June last year when the Anglo-Australian miner rebuffed a bid that would have taken the state-owned Chinalco's stake to 18 per cent, in return for a $19.5bn investment.

The proposed deal upset a number of the company's smaller shareholders, forcing Rio to pay as much as $200m in break fees, and give up on a deal that would have helped the group to cut its then burgeoning $20bn debt pile. Rio has since sold off a number of assets.

While the two parties have not finalised an agreement, Chinalco spurred the talks on Monday, when its Vice-President, Lu Youging, said the group was looking for overseas deals. "Chinalco's strategy is to be an international multi-metals mining company. To achieve this goal, we are constantly seeking fair and mutually benefiting opportunities in the international market," Mr Lu said.

Rio shelved plans to develop the Simandou iron ore project in Guinea last year after commodity prices slumped in the wake of the economic downturn. The group has described the Simandou site as the biggest undeveloped iron ore deposit in the world. Two years ago, Rio said that it would cost $6bn to develop the project, although analysts believe the cost has now probably risen to twice that amount.

Rio Tinto is desperate to get on better terms with the Chinese after a year that tested its relationship with what is one of its biggest clients. Soon after Rio walked away from the deal with Chinalco, four of the group's employees, including the Australian national Stern Hu, were arrested on suspicion of stealing Chinese state secrets. The four were formally indicted on the lesser charges of bribery and commercial spying earlier this year. Rio Tinto has refused to comment on the case.