Vale Wants More for Its Iron Ore; China Won't Budge 8 comments
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It’s the "teach a man to fish" theory of steelmaking: Buy iron ore from someone else, and you have it for a day (actually, 365 days, since iron ore is sold in year-long contracts), but buy your own mine, and you have iron ore for life.
China’s steelmakers are worried about the price of their biggest ingredient.
China’s growth is tied to the construction of new offices, apartment buildings and Olympic-commemorative sports complexes. And all of those new high-rises and architecturally avant-garde fitness centers pushing their way into the Beijing and Shanghai skylines need a lot of steel, so much that the government limits the amount that can be exported, flooding the domestic market to keep steel prices artificially low. And steel needs a lot of iron ore.
China has three major iron ore suppliers: Australia’s BHP Billiton (BHP) and Rio Tinto (RTP) both raised their contract prices on China this year by as much as 97%. And right now, the country’s steelmakers are engaged in a staring contest with the third, Brazil’s Companhia Vale do Rio Doce (RIO), waiting to see who’ll blink first.
Vale, which only got a 71% increase in this year’s contract price, wants more money and canceled its shipments to the country until China coughs up the dough. But the Chinese steelmakers, many of which are still on the government’s short leash, aren’t budging on their contract prices, even if they are 11% lower than Vale charges its European customers.
In the meantime, China is shopping around for its own iron ore mines to solve the supply problem altogether. Jiangsu Shagang Group, one of China’s largest state-controlled steel companies, just bought a 45% stake in Australia’s Grange Resources [ASX:GRR]. (Anybody else notice that China is slowly buying all of Australia? Shouldn’t this alarm someone? Like the prime minister or whoever runs the country’s military?)
Shagang already controls Australian Bulk Minerals, which operates a Tasmania iron ore mine. And it plans to combine the two companies to create a billion-dollar (I’m not being hyperbolic, the new company will be worth about 1 billion Australian dollars) iron ore miner.
If China’s steelmakers continue on their current plans, Vale may find itself not as vital as it once thought. Perhaps 71% is a good enough raise for 2008. Afterall, with only three months left in this year’s contract, negotiations for next year could make up for all of the lost profits in this year’s contract.
Disclosure: None.
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This article has 8 comments:
The Chinese are very busy developing sources of minerals in Africa, South America and the East. While our two major parties are busy 'one-upping' each other during our 'silly season', they are busy tying up future markets. Look at Fortesque (FSUMF.PK) as a future purchase.
China is also very actively stonewalling price increases. Look at their coal purchases from Malaysia rather than the normal sellers. They seem to be buying spot prices wherever cheapest right now and refusing to buy if the price does not meet their expectation. I suspect they are playing a waiting game while the world markets are in turmoil.
Vale has a cost penalty over BHP and RTP as it has to ship from So. America. Vale does have a nicely constructed self owned transportation system within So. America and has ordered its own ships ..( Which I believe are due to be delivered in 2010 ) as a means of reducing that exposure.... It will be interesting to see who blinks first.
jegan ;-)
I had heard that the Chinese were reducing the nickel content of their stainless.... Wonder when my Popeil Ginzu knives are going to start rusting?
Also, I thought Norilsk Nickel was the worlds largest nickel producer.... Can't find any profile on VALE on the Yahoo site..
thx jegan ;-)
-by Li Chunlan and Jessica Jiao
Shanghai. September 22. INTERFAX-CHINA - Brazilian-based Vale, the world's largest iron ore producer, has temporarily suspended iron ore shipments to Chinese steel mills following disputes over hikes to contracted prices, a Chinese steel industry insider told Interfax on Sept. 22.
-by Jessica Jiao
Shanghai. September 26. INTERFAX-CHINA - Chinese steel mills are unlikely to be the first among Asian steel mills to accept Vale's recent price hike request due to their low number of contracts of affreightment (CoAs) and access to alternative domestic iron ore sources, a Mysteel analyst told Interfax on Sept. 25.
thx jegan ;-)