Iron ore giants cut 4th quarter prices by 10%

14:43, October 14, 2010      

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In recently-released quotes, BHP Billiton, Rio Tinto and Vale, the three global mining giants, announced they will reduce prices on iron ore sold to Chinese steel mills by 10 percent starting from October, according to today's issue of Beijing Business Today.

This is the first time the price of iron ore from the three enterprises has fallen since the start of 2010. Industry analysts believe that the drop in demand from China is the key reason behind the price reduction.

According to the latest statistics from the General Administration of Customs, China imported 460 million tons of iron ore in the first three quarters of 2010, a drop of nearly 3 percent from a year earlier. The average iron ore import price was up more than 56 percent to 121.7 U.S. dollars per ton.

"China is the largest buyer from the three mining giants, and its steel demand is declining," said a deputy general manager from China Minmetals Corp. said. "The overall steel market demand is currently slowing, so lowering future iron ore prices will allow them to match iron ore prices in the spot market."

Chen Ling, deputy director of the Metallurgical Economic Research and Development Center, said that the fundamental reason behind the three big mining giants' iron ore price reduction lies in the declined growth rate in the overall steel demand, which has directly resulted in the shrinkage of the demand for the raw material of iron ore.

China's domestic steel market was weak over the past several months, and the operations of steel mills were under relatively heavy pressure. Moreover, the stronger-than-expected determination of the government to restrict steel output and electricity consumption in order to promote energy efficiency and emissions reduction has caused many enterprises to proactively or passively reduce steel production and to lower their demand for raw materials accordingly.

Furthermore, the continued implementation of housing regulatory policies has considerably reduced the building steel demand. The moves to eliminate backwards steel production capacity and implement the "Norms for Production and Operation of the Iron and Steel Industry" and other factors have all restrained the rise in China's overall steel production capacity, which has in turn restricted the steel mills' demand for raw materials.

However, given the nearly 30 percent increase in iron ore prices in the third quarter, a 10 percent price reduction in the fourth quarter may produce only limited effects, though it is still good news for Chinese steel companies. Insiders said frankly that the three mining giants still enjoy an oligopoly status.

Zeng Jiesheng, an analyst at Mysteel.com, said that previously domestic steelmakers only imported limited amounts of iron ore because of the sky-high prices, but now as the prices have dropped and inventories of raw materials need to be supplemented, the imports of iron ore will very likely increase somewhat in the fourth quarter.

"The key to breaking the bottleneck of iron ore supply is to properly control the rapid growth in steel output," one expert said.

China has witnessed double-digit growth in steel output each year in the past eight years, but its iron ore supply obviously cannot keep up with growing demand, which has provided "good grounds" for the three iron ore suppliers to raise prices, he said.

Chinese steel companies have been playing a passive role in iron ore negotiations for a very long time, and are now trying to turn the table through increasing their iron ore self-sufficiency ratio. At present, China's dependence on imported iron ore is decreasing step by step.

Wuhan Iron and Steel Group now owns more than 10 billion tons of iron ore reserves worldwide. The steelmaker's General Manager Deng Qilin once said publicly that the company will carry back 6 million tons of iron ore from abroad in 2010, which will account for 25 percent of its demand. The company will be entirely self-sufficient in iron ore five years later.

Hebei Iron and Steel Group also said clearly that it will achieve an annual increase of 5 million self-produced iron ore in the next five years, and increase the self-sufficiency ratio to 35 percent by the end of the 12th Five-Year Plan period (2011-2015) while reducing the share of imported iron ore from 50 percent to below 30 percent.

By People's Daily Online

(Editor:祁澍文)

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