Rio Tinto bows to inevitable on iron ore prices
By Javier Blas in London
Published: March 24 2009 16:06 | Last updated: March 24 2009 16:06
Rio Tinto on Tuesday became the first global miner to acknowledge publicly that annual contract iron ore prices for the year starting in April will fall as demand for steel collapses amid the economic crisis.
Its acknowledgement signals that the industry is about to break with six consecutive years of price increases totalling 500 per cent, which had been propelled by the industrialisation and urbanisation of China, the world’s largest iron ore consumer.
“We need to recognise the fundamentals of the market and the market would show that there does need to be a downward adjustment,” said Sam Walsh, head of Rio Tinto’s iron ore division at a mining conference in Perth, Australia, echoing a view held in private by other companies’ senior executives.
Mr Walsh’s comments came as the ongoing secretive negotiations between Chinese steelmakers, led by Baosteel, and miners Vale of Brazil, Rio Tinto and BHP Billiton try to reach an agreement.
China is pushing for a 40-50 per cent cut, while the miners are delaying the talks, gambling that demand will recover and they will be able to avoid a large price reduction.
The negotiations traditionally finish in March, before the start of the Japanese fiscal year in April.
Iron ore is the world’s second largest commodity market by value, after crude oil. The annual talks to settle prices influence the global economy as the cost of the ore filters into steel prices.
Mr Walsh added that analyst and steelmakers’ forecasts of ore prices halving were out of line. “If you look at the current spot price it really doesn’t verify a 50 per cent reduction in prices,” he told reporters.
Macquarie, the Australian bank, estimates current spot prices at just above $60 a tonne, a 40 per cent discount to current annual benchmark contracts.
Jim Lennon, an analyst at Macquarie in London, said that Chinese steelmakers and global miners were likely to settle at higher prices than current spot prices, forecasting a drop of 35 per cent from last year’s agreement, because today’s prices would trigger losses to Chinese ore miners. |
