China Steel Mills Avert Showdown With Iron Ore Deal

Chinese steelmakers narrowly averted a showdown with Australian iron ore suppliers, when they agreed to a higher-than-expected rise in term iron ore prices a week before they would have had to start paying much higher spot prices.

Factory, Anshan, China
Factory, Anshan, China

Baosteel agreed on Monday on behalf of its Chinese rivals to pay up to 96.5 percent more for iron ore under a term contract with Australian miner Rio Tinto , higher than the 67 to 71 percent that Japanese mills and Brazilian miner Vale clinched in February.

The Chinese industry would have had to begin paying much higher spot rates for iron ore from Australia had miners and mills failed to reach a settlement by June 30.

Shares in listed Chinese steel makers fell 2 to 3 percent on Tuesday morning, as investors factored in narrower margins as steelmaking costs rise.

Baosteel agreed to a 79.88 percent price rise for Pilbara blend fines and Yandicoogina fines, and a 96.5 percent price rise for Pilbara blend lump for the fiscal year 2008.

But it said the traditional annual pricing system had been maintained despite an unprecedented divergence in the price rise of Australian ore and Brazilian ore.

The higher ore prices will raise the cost of producing one ton of crude steel by 120 yuan ($17.89) compared with last year, for mills that supplement term contacts with domestic supply, according to an analysis by Helen Lau of Daiwa Securities.