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August 18, 2009

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China seals iron ore contract

CHINA has secured an iron ore supply contract with a smaller Australian miner as it continues to persuade the world's top ore producers to lower their prices but analysts say the chances of them agreeing to do so are slim.

Chinese steel makers agreed with Fortescue Metals Group Ltd on a 35 percent cut in the price for iron ore fines, a major type, for the second half of 2009, the China Iron and Steel Association said yesterday.

China will seek the same reduction from larger suppliers, Shan Shanghua, CISA's secretary general, told reporters in Beijing.

The cut, though deeper than the 33 percent reduction earlier set by Rio Tinto with other Asian mills, means China is scaling back its earlier demand for a cut of at least 40 percent.

But analysts said it would be very difficult for Brazil's Vale and Anglo-Australian miners Rio Tinto and BHP Billiton, the world's top three ore suppliers, to follow Fortescue given the recovery in demand and higher spot prices.

"There's almost no likelihood the top three will offer the same cut," Umetal, a consulting firm, said in a note, adding that Rio and BHP would not be in a hurry to settle term prices with Chinese mills because they could easily get better prices on spot sales.

Chinese mills led by Baosteel Group Corp will pay 94 US cents a dry metric ton unit for Fortescue's iron ore fines, or about US$55.50 per metric ton, the Australian miner said.

Rio is charging about US$61 a metric ton for its fines under term contracts.

A Rio spokesman said the company didn't see Fortescue's deal as relevant to its own pricing for fiscal 2009 while BHP declined to comment.

"The Fortescue deal is more of a symbolic one given the company's much smaller scale," Mysteel Research Institute analyst Zeng Jiesheng said. "But this also shows a China price could be created independent of a (benchmark) international pricing system."

Fortescue, Australia's third-biggest iron ore exporter and partly owned by China's Hunan Valin Iron and Steel Group, will sell 20 million tons of iron ore to China in the second half of the year.


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