Strong Signs Spur Iron Talks

By Kishori Krishnan Exclusive To Iron Investing News

Rio Tinto has completed the sale of its Corumba iron ore mine in Brazil to mining giant Vale SA for a cash consideration of $750 million. The Corumba sale, which was agreed in January, includes a potash project in Argentina and exploration assets in Canada.

The Corumba mine produced 2 million metric tons of iron ore last year. Brazil’s Vale says Corumba is rich in direct reduction lump ores, a highly valued type of iron ore which is becoming increasingly scarce around the world.

Over the last 18 months, Anglo-Australian mining giant Rio Tinto has announced asset sales of $6.6 billion, including the Corumba and potash transaction. In addition, Melbourne-based Rio Tinto has received a binding offer from Amcor for $2.025 billion for its remaining divisions of Alcan Packaging.

The resources giant bought the overall Alcan aluminium and packaging business at the height of the commodities boom in 2007, saddling it with US$ 38 billion of debt during the global financial crisis. The aluminium unit has forecast a 4.1 per cent growth in aluminium demand over the next two decades but says recovery signs in the aluminium market remained mixed.

The company recently said it was on track to reach US$ 1.1 billion in net earnings from synergies by 2010, a big jump from the US$ 585 million (A$ 675.25 million) achieved in 2008. Rio Tinto Alcan is also preparing to restart idled production capacity at its Vaudreuil alumina refinery in Quebec Canada.

More tie-ups

Also gathering steam, United Group Ltd has secured a contract valued at $165 million with BHP Billiton Iron Ore at Port Hedland, Western Australia, for the fabrication and on site installation of structural steel and mechanical equipment associated with transfer stations, conveyors and shuttles for BHP Billiton Iron Ore’s Rapid Growth project 5.

Managing director and CEO Richard Leupen said the contract was an important win for the company, cementing its position as a leading engineering and construction services firm in the resources sector. “UGL has an excellent track record and a strong history in the iron ore industry,” he said adding:
“We continue to strengthen our presence in the WA resources sector.”

Drive up demand

Meanwhile, the clouds appear to be dissipating for the iron ore talks between miners including BHP and Chinese customers, that have been particularly fraught this year as China’s top negotiator held out for a deeper cut than that secured by other Asian mills, even as spot prices soared.

Discussions with the Chinese about iron ore pricing for 2010 are scheduled to begin next month, even though no benchmark prices have been set for this year. BHP Billiton is still in talks over some current year benchmark iron ore contracts with Chinese steel firms, and will start next year’s talks in October, its head of marketing Tom Schutte has said. “We’re still negotiating with China,” Schutte said. Negotiations for pricing in the 2009/10 shipping year will come about in the next month, he said.

Spot iron ore prices to China peaked at US$ 115 a tonne in August, but have since slid back to US$ 82-US$ 84 this week, still a premium of around 14 per cent to the benchmark.

The miner also said that China’s accelerated growth trajectory was sustainable and this in turn will drive up demand for iron ore and coal.

“Economic upswing in China is well advanced, with most indicators showing signs of recovery,” Schutte said adding: “China will remain a major opportunity for iron ore with metallurgical coal demand growth focused on both India and China.”

Price issue

Iron ore demand is set to soar in the next 15 years, with 1 billion incremental tonnes of iron ore expected to be needed to meet China’s demand. BHP has made no secret of its desire to drop the traditional benchmark system of selling iron ore at one price for a 12-month period, in favour of what it calls more transparent arrangements such as index pricing.

“Benchmark prices do not adequately reflect the supply demand fundamentals clearly,” Schutte said. Besides iron ore, BHP had made headway in coking coal, where some of contracts for the year had been renegotiated from annual to quarterly pricing regimes. The switch to quarterly pricing comes as Australia miners, including BHP, step up coking coal exports to China.

This year total Australian exports to China will balloon to 30 million tonnes from just one million tones in 2008, largely at the expense of Chinese domestic production, which was falling.

Good signs

China’s iron ore imports have slumped, falling 15 per cent in August to 49.6 million tonnes, the lowest level this year, as the country produces a growing glut of steel thanks to overcapacity in the sector. “Overproduction is the main reason for the 18 per cent correction in spot steel prices during the past five weeks,” Jing Ulrich, JPMorgan’s chairman of China equities & commodities, said.

“China’s largest producer, Baosteel, recently lowered the price of its major steel product by 6 per cent for October, following cuts of up to 19 per cent by several major Chinese steel mills. Prices of iron ore and major steel products could stabilise in the near term.”

The lower imports are understood to be the result of a combination of higher Chinese domestic production and the mining giants selling ore to their more traditional markets, such as Japan and Korea.

Petra Capital resources analyst John Veldhuizen said the demise of the benchmark had been “brewing” for a while. BHP Billiton last week signed an eight-year iron ore supply agreement with South Korean steelmaker Hyundai Steel covering 22 million tonnes.

The terms of the deal were not released, but it is understood the contract for new volume is not based on the annually negotiated benchmark price and is likely to be index-based or reset quarterly.

Cash-settled iron ore swap contracts have so far emerged as one of the most popular tools, while LCH.Clearnet’s introducing of clearing for these contracts has provided further transparency and helped attract more participants in this emerging market.

Gaining ground

The following is a lift of services provided by various companies:

* Credit Suisse and Deutsche Bank launched in May 2008 an over-the-counter (OTC) iron ore paper market, offering cash-based swaps, which are settled against published indices against spot physical iron ore delivered in China.

* Credit Suisse sees its iron ore OTC trade volume doubling this year to around 20 million tonnes, as the benchmark pricing system looks set to break down.

* Morgan Stanley trades cash-settled iron ore swaps against prices provided by the The Steel Index. The bank says their iron ore business is closely linked to dry-freight business.

* Barclays Capital said the bank was still looking to enter into iron ore trading, both physical iron ore and swap contracts, but the decision was yet to be taken.

* The Singapore Exchange (SGX) launched the world’s first cleared OTC iron ore swaps contract in April. Trade volume jumped more than five-fold to nearly 1 million tonnes in August from its April launch but remained relatively meagre, accounting for less than a day’s worth of imports by China.

* London-based clearing house LCH.Clearnet began clearing iron ore swap contracts earlier this year. The contracts are settled against The Steel Index, with the contract size 1,000 metric tonnes.

* London-based brokers Freight Investor Services trades a cash-settled iron ore swap contracts, which are cleared by LCH.Clearnet and delivered to China including cost and freight.

Corporate news

STX Pan Ocean Co, South Korea’s biggest bulk-shipping line, rose to the highest in more than a month in Singapore trading after securing its largest contract to move iron ore from Vale SA.

Baffinland Iron Mines Corporation reported its results from its lump iron ore trial cargo shipped to ThyssenKrupp Steel in October 2008. A 54,464 tonne lump iron ore cargo was shipped to ThyssenKrupp Steel as part of Baffinland’s 113,217 tonne lump and fine iron ore trial cargos mined in 2008 for its bulk sample program at its wholly-owned Mary River Iron Ore project.

Consolidated Thompson Iron Mines Ltd., developer of the $650 million Lac Bloom iron ore project in Quebec-Labrador, said Friday it raised the maximum $144 million via a private placement of common stock at $4.40 a share, including an over-allotment of shares. Its Chinese partner Wuhan Iron & Steel took up enough stock to maintain its 20 per cent equity stake.