Industry meltdown possible if miners stick to price hike

08:35, May 21, 2010      

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Chinese steel mills have expressed their reluctance to accept iron ore prices of potentially $160 per ton proposed by Vale and BHP in the third quarter, saying that the price hike will create carnage in the nation's steel industry.

"BHP has recently informed us that they will raise third quarter iron ore prices, including freight, to $160 a ton, which is unacceptable for us," according to an official from a large steel mill in northern China, adding that the request from the miner was "tentative" to test the market.

"We will become unprofitable with such prices on the back of a persistent fall in steel prices," the source said.

Wuhan Iron and Steel also received notice from Vale, the world's largest miner of the mineral, on Tuesday to pay $160 for iron ore in the third quarter.

The price is approximately 23 percent higher than that in the second quarter.

Brazilian Vale and BHP, the world's third-largest exporter of the mineral, ended a 40-year tradition of annual benchmark prices with Asia mills this year by signing quarterly contracts, in which miners will benefit significantly from rising spot prices for iron ore trading at more than double the annual price.

Yet after the government issued policies to crack down on the sizzling property market early this year, domestic steel prices have undergone steep drops on retreating domestic demand and mounting inventories. Mysteel's composite steel price index has accumulatively lost 7.86 percent in a month to close at 155.9 points on Wednesday.

But most medium- and small-sized steel manufactures have yet to receive any information on the price increase.

"We heard rumors about the price hike, but haven't been informed by the miners," said a sales executive from a medium-sized steel mill based in Hebei province, adding that the price is unreasonable give the steep slump in iron ore prices in recent weeks. "It will be too expensive to afford."

The spot price of 63.5 percent-content iron ore imports to China was between $160 and $163 per ton on Thursday, down from April's $190 per ton, according to Umetal.com.

"We will see a complete loss in the steel industry if the much-talked-about price is inked, and most small-sized mills will go bankrupt," said Chu Xueliang, an analyst at China Jianyin Investment Securities.

According to Chu, domestic steel mill's pays around 4100 yuan ($600) per ton when the iron ore price stays at $110 per ton. That price will climb to around 4,620 yuan per ton if the mineral's price is set at $160 per ton.

At present, steel manufacturers sell to steel traders wholesale for between 4,200 yuan to 4,800 yuan per ton.

"We estimate that the acceptable price for Chinese steel mills is around $130 per ton in the third quarter," Chu said.

Source: China Daily

(Editor:黄硕)

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