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China weighs on miners to cut ore prices to 2007 level

CHINA is pressing global miners to cut term iron ore prices to 2007 levels as its mills struggle with falling steel prices and faltering demand, a senior industry official said yesterday.

A drop to 2007's level, meaning a cut of more than 40 percent for Australian benchmark ore, would be the biggest annual fall in history and end six straight years of price gains.

"Ore prices should move closer to steel prices," said Shan Shanghua, secretary general of the China Iron and Steel Association. China's composite steel price index has fallen to a low last seen in November, which was also the worst since 1994, as a global recession hurt demand, leaving more than 60 percent of domestic mills in the red.

"Ore prices for this year should be negotiated based on the 2007 level as the chaotic situation in 2008 can't reflect actual supply/demand picture," Shan said in Shanghai.

Global brokerages also recently revised downward their forecast on ore rates, saying miners have to concede bigger cuts to compete with spot suppliers amid a sharp drop in steel output globally. Goldman Sachs JBWere forecast a 40-percent drop from a previous 30-percent fall, while Macquarie Bank sees a 35-percent cut from 30 percent.

Asian mills are in talks with the three dominant ore producers - Brazil's Vale, Australia's BHP Billiton and Rio Tinto - on term ore prices. The negotiations usually result in a deal before April 1 when the fiscal year for ore contracts starts, though talks can drag on for longer. Miners are understood not to be in a hurry to conclude deals this time as they are hoping China's demand could be revived with state stimulus measures. Shan indicated China would offer the largest volume to a miner that agrees to its request.

To strengthen China's hand, Baosteel Group Corp is discussing the total purchase volume of ore that Chinese mills will buy this year, Shan said. Baosteel previously only discussed its own needs and smaller mills followed its term prices.

China's crude steel output could decline at least 8 percent this year to 460 million tons, Shan said, describing this situation as the "most optimistic" scenario.


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