FOREX WORLD TREND

Aug. 17 (Bloomberg) -- China will ask Vale SA, Rio Tinto Group and BHP Billiton Ltd. for a 35 percent cut in iron ore prices, scaling back demands for a larger reduction after seven months of stalled talks with the world’s biggest producers.

The China Iron & Steel Association agreed on the reduction with Australia’s Fortescue Metals Group Ltd., and will seek the same cut with larger suppliers, Shan Shanghua, the secretary general of the China Iron & Steel Association, said today at a press conference in Beijing.

The pact marks a step back from China’s earlier demand for a 45 percent price cut, and brings it closer to the 33 percent reduction offered by Rio and BHP. The nation’s lenders will arrange $6 billion of financing to help Fortescue, part- owned by China’s Hunan Valin Iron & Steel Group, expand as part of the deal, as the world’s largest iron ore buyer seeks to reduce its reliance on Vale, Rio and BHP.

“Fortescue and China are hoping the miner has the potential to break the duopoly of BHP and Rio” for Australian iron ore, said Zhou Xizeng, a Beijing-based analyst with Citic Securities Co. “The 35 percent deal is symbolically a bigger cut. It signals Fortescue and China have made concessions.”

Fortescue, Australia’s third-largest ore exporter, rose 2.9 percent to A$4.58 in Sydney. Rio dropped 4.8 percent and BHP Billiton fell 3 percent. Baoshan Iron & Steel Co., the listed unit of China’s largest mill, fell 7.6 percent in Shanghai.

Rio Rejects

“We do not see this pricing agreement as relevant to our pricing for fiscal 2009,” Gervase Greene, a spokesman for London-based Rio Tinto said from Perth. Samantha Evans, spokeswoman for Melbourne-based BHP, declined to comment.

Fortescue will sell 20 million tons of iron ore in the six months ending Dec. 31, and China will give it priority to negotiate 2010 prices, the Perth-based company said. China bought 444 million tons of ore last year from suppliers.

“The FMG agreement won’t end the long talks between China and the largest suppliers,” said Hu Kai, a Shanghai-based analyst with Umetal Research Institute. “Fortescue is too small to be representative in setting benchmark prices.”

Fortescue has been seeking funding as a cash squeeze and lower iron ore prices forced it to put expansions on hold. The company may need between $3 billion and $4 billion to proceed with plans to almost double output, Hunan Valin, its second- largest shareholder, said in May. Fortescue has been in talks with China Investment Corp., the nation’s sovereign wealth fund.

Peng Min, a spokeswoman for Valin, decline to comment.

One Price

Baosteel Group Corp., China’s largest steelmaker, and other mills will pay 94 U.S. cents a dry metric ton unit for fine iron ore, the association’s Shang said. That’s equal to $55.50 a metric ton, Fortescue said in a statement. Rio is charging 97 cents a dry metric ton unit, or about $61 a ton, for its fines.

“China will apply this price in talks with BHP, Vale and Rio,” Shan told reporters. “The agreement is an important step for establishing a China model of only having one price in China, whether it’s for small, large, private or state-owned mills.”

The Fortescue agreement could save China’s mills $30 million in costs, said Umetal’s Hu.

Talks between China and producers have lasted longer than any time in the past 40 years. The steel association last month accused suppliers of encouraging “speculative actions” in pricing and imports after volumes surged to a record.

China last week formally arrested four Rio executives, including Australian Stern Hu, head of the company’s iron ore business in China. The executives are accused of stealing commercial secrets from its steel industry.

Largest Importer

“It is hard to be fair to China if another country, with only 10 million to 20 million tons of imports, decide prices for China, which imports 500 million tons a year,” Liu Zhenjiang, vice chairman of the China Iron & Steel Association, said today on the association’s Web site.

China overtook Japan as the world’s largest buyer of iron ore in 2003. China, the biggest steelmaker, accounted for 52 percent of globally iron ore traded last year, according to Morgan Stanley. That could increase to 65 percent this year, the brokerage said July 2.

The State Council, China’s cabinet, has issued a statement backing the plan to have one iron ore price within China, the steel association’s Liu said today.

“This is a mechanism which really allows China to consolidate its own pricing mechanism, to reach for the same kind of stability that other countries have always enjoyed,” Fortescue’s Chief Executive Officer Andrew Forrest said today on a conference call.

Price talks for next year will start in December and China hasn’t decided if the negotiations would be for annual or semi- annual contracts, the steel association’s Shan said.

China’s steel production jumped 13 percent to a record 50.7 million tons in July, according to the National Bureau of Statistics on Aug. 11. Rising demand from steelmakers also pushed iron ore imports to a record 58.1 million tons last month.
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