Rio offers price cut to Asian firms

The Rio Tinto Group, the world’s second-largest iron ore producer, offered a temporary 20 per cent price cut to Asian steel makers after annual contract negotiations stalled, said four executives with knowledge of the deal. Major customers were offered the interim discounts, two of the executives said, declining to be identified because the agreements are confidential.

Annual contract talks may take another four months to settle, Citigroup Inc said on April 3. Mills typically pay prices at last year’s levels until new rates are settled.

“Most Chinese steel makers won’t agree to that because buying at a 20 per cent discount would make the production costs higher than product prices,” said Cherry Chen, a Beijing-based analyst at Core Pacific-Yamaichi International. “At least a 30 per cent cut may be needed. I wouldn’t rule out the possibility that some mills would agree to Rio’s offer to maintain long-term cooperation.”

Rio fell 81 pence, or 3.7 per cent, to 2,127 pence by 9:57 am on the London Stock Exchange, cutting the company’s market value to 33 billion pounds ($48 billion). In Australia, Rio shares closed 10 per cent lower, the biggest drop since December 4.

Locked in talks
The company offered a 20 per cent price cut for iron ore fines, the benchmark product, and 25 per cent for iron ore lump, the two executives said. Iron ore fines, a powder, is used mainly in steel production, while lump is solid ore.

China’s steel makers posted a combined loss of 770 million yuan ($112 million) for January and February as prices for their products collapsed, the government said last month.

Steel makers and iron ore producers are locked in talks to settle annual prices for the year that began on April 1. Vale do Rio Doce, Rio and BHP Billiton account for about three quarters of globally traded iron ore, shipped from Brazil and Australia.

Amanda Buckley, a Melbourne-based spokeswoman for Rio Tinto, declined to comment today. Shan Shanghua, general secretary of the China Iron & Steel Association, couldn’t be reached at his office phone for comment. Chen Ying, vice-president of Baoshan Iron & Steel Co, China’s largest steel maker, didn’t return calls seeking comment.

2007 levels
Mills have asked for cuts in benchmark annual prices to $50 a tonne, about the level reached in 2007, one of the executives said. Australian iron ore fines were settled at about $92 a tonne last year. Ore makers say they can get higher prices selling the material on the spot market, an executive said.

Spot prices are trading at $63 a tonne, below the February high of $84 a tonne, as demand from steel makers has dropped, Citigroup analyst Johan U Rode wrote in an April 3 report.

China is pressing producers to cut 2009 contract prices to below 2007 levels, or at least a 44 per cent reduction for Australian ores, the China Iron & Steel Association said on March 19. That would be the first reduction in seven years. Prices almost doubled in 2008.