Brazil is being asked to lower the prices of iron ore by China the world's largest steel producer. The Chinese want suppliers to cut prices to meet the falling international price of steel which has dropped to 1994 levels, according to an official with China Iron and Steel Association (CISA).
"Iron ore prices should be consistent with steel prices, which have fallen to the 1994 level. We will require Rio Tinto and other suppliers to cut prices sharply," said Shan Shanghua, secretary in general of CISA.
An earlier forecast by Australia and New Zealand Banking Group Ltd. said China might demand a 50% price cut by producers Vale do Rio Doce from Brazil, Rio Tinto and BHP Billiton.
This year benchmark contract iron ore fines sold by Rio Tinto cost in the range of US$ 92.58 per metric ton, while in 1994 the price was US$ 16.685 a ton. Making iron ore prices consistent with current steel prices in China would mean an 82% decline.
"We are negotiating the plan, as Chinese companies take calendar year as their fiscal year" another senior executive at the China Iron and Steel Association (CISA) was quoted by Reuters.
The official declined to be identified due to the sensitivity of the issue but another source with direct knowledge with the matter said European steel makers such as India's ArcelorMittal also supported the plan.
Xinhua reported that according to CISA in October 42 of 71 large and medium-sized Chinese steel makers suffered losses. Shan Shanghua told Xinhua the losses for those 42 firms totaled the equivalent of 1.1 billion US dollars and reflected dropping demand.
If there is a cut in iron ore prices in 2009, it would be the first in seven years. Merrill Lynch & Co. said on Friday that prices may drop 20% next year and BHP may have to cut output by 25%.
Vale Doce, Rio Tinto and BHP Billiton account for three quarter of sea borne traded iron ore, Rio and BHP ship materials from Australia and Vale, the largest supplier, from Brazil.
In 2008 price talks, Brazil's Vale negotiated its price first and secured a 65% increase in term prices for iron ore fines. But Australian producers Rio Tinto and BHP Billiton settled later and managed a near 80% increase for fines.
Since the world's top three iron ore miners control more than two thirds of the global seaborne trade, the mineral is sold under annual contracts that are often hammered out during months of acrimonious negotiations between the three miners and steelmakers.