Vale Settles with Arcelor Mittal: What Next for China?

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Commodities, Ferrous Metals

In the absence of any really interesting news, steel makers are playing the game of guess what China will settle at. When the major iron ore producers settled with Japanese and Korean steel makers last month bets were still on that China may get its target of a 40-45% reduction from 2008 contract prices. But Vale has just announced they have settled with the Arcelor Mittal, the world’s largest steel maker, at the same level as the Japanese and Korean mills according to Reuters. The paper reports Vale lowered the prices of iron fines by 28.2%, iron lumps by 44.5% and iron pellets by 48.3%. Why does everyone talk about discounts from last year’s price rather than the actual price fixed? Because the actual price is an equation not a fixed price (depending on the Fe content of the ore) and because the Chinese have set this arbitrary target of a minimum 40% reduction and the world is watching if they achieve it. According to Trading Markets.com Vale’s new reference prices per dry metric ton unit (dmtu) FOB are $0.9651 for Southern and Southeastern System fines (SSF), $1.0095 for Carajás sinter feed (SFCJ), and $1.0962 for Southern System lump. The pellet price fell the most relative to 2008 because Vale is said to be keen to fill capacity at their pelletizing plants. The new reference prices per dmtu are $1.1384 for blast furnace pellets and $1.2523 for direct reduction pellets. For anyone interested in how this is used to calculate the actual cost per ton Vale kindly defines the equation here.

The question now is how much longer China will hold out and more important, if they will manage to settle at a price below those accepted by Japanese, Korean and European mills. China can continue to buy on the spot price and has large stocks sitting at ports and in producers stock but with steel production rising again they will want some degree of stability even if they continue to buy on the spot market. CISA, the China Iron and Steel Association that has taken over from Bao Steel as the primary negotiating partner with the iron ore producers is said to be seeking quarterly spot prices as annual contract talks have reached deadlock according to Bloomberg. CISA is also desperate to maintain discipline in the negotiating process warning mills not to settle their own deals. Chinese mills are notorious for being more focused on sales and growth over short term profitability but so far mills have largely followed CISA’s lead. It is beginning to look less and less likely that China will get its 40-45% reduction though. Bets anyone?

–Stuart Burns

Comment (1)

  1. Fred says:

    we are pretty long VALE as well as the EWZ and one thing I know about Brazilians is they like cash flow. Furthermore, we will start seeing an uptick in India-Brazil trade from here on out and my hunch is that will suck the Chinese in big time because they want not only the raw material but the bilateral relationship.

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