Round two

With the acrimony of 2009’s iron ore contract negotiations still fresh, China and the Big Three miners – Rio Tinto, BHP Billiton and Vale – are about to lock horns over prices for 2010.

The 2009 talks never reached a satisfactory conclusion; the China Iron and Steel Association (CISA) refused to budge, leaving its steel mills to buy iron ore on the spot market when prices were on the rise. Few analysts are betting against a repeat performance. "It will take a long time to reach an agreement because at the moment China’s steel production is too high and its iron ore imports are too big," said Dr Xu Zhongbo, head of Beijing Metal Consulting.

The miners are likely to ask for a price increase to protect their profit margins against unfavorable foreign currency markets, said Thomas Wrigglesworth, head of metals and mining at Citi in Hong Kong. The rise in the Australian dollar’s value against the US dollar means Rio Tinto and BHP Billiton both need a 17% increase in the price of iron ore to match their 2009 profits. Reports as of mid-November indicted they may ask for a 30% hike.

Leverage the yen

The Big Three will probably negotiate with Japan’s steelmakers first. The yen has appreciated against the US dollar this year, which means Japanese mills can absorb an increase in iron ore prices while keeping costs flat. After setting a benchmark, the miners would offer the same price to CISA. That price is not likely to be accepted.

"Last year, CISA got egg on its face," said Michael Komesaroff, principal of Urandaline, a mining consultancy. "Not to come up with a reduction would be hard for them politically."

CISA is projecting excess steel inventory will limit steel demand growth to just 5% in 2010 from 19% this year. Yet it is asking for fixed-term iron ore contracts, with discounts for mills that put in big orders. Analysts say this is a sign of rising steel demand.

"If you’re a miner you don’t want that… because if the Chinese want that it means demand is going up," said Wrigglesworth.