Deal signals China's ore talks tactic
By Fu Chenghao |
August 21, 2009, Friday
|
Print Edition
Print Edition
CHINA this week agreed to arrange US$6 billion in cheap loans to smaller Australian miner Fortescue Metals Group Ltd as part of a deal in which China's steel industry secured the lowest iron ore prices negotiated this year.
Fortescue, Australia's third-largest iron ore miner after Anglo-Australian giants Rio Tinto and BHP Billiton, agreed to supply China with 20 million tons of ore during the second half of this year at a 2 percentage point discount to the 33 percent price cut Rio earlier negotiated with non-Chinese steel mills.
Although the price differential is not wide and the supply volume not large, the Fortescue deal illustrates China's strategy of trying to undercut the monopoly enjoyed by the world's three biggest iron ore producers: Rio, BHP and Brazil's Vale.
"A small difference in prices is obviously not all that China wants from the deal," said Shanghai Securities analyst Zhu Limin. "China is willing to provide financing to help Fortescue ramp up production and to support output growth outside the big three."
Details of the loan were still under discussion.
Under the deal, Fortescue will sell its total production to China by year end. That's only a fraction of China's annual imports of about 500 million tons of the ore used in steelmaking.
In only its first year of production, Fortescue is dwarfed by domestic rivals Rio and BHP, whose output ranks Australia as the world's biggest iron ore exporter. The loans will enable cash-strapped Fortescue, which has delayed expansion, to fulfill its aim of increasing annual capacity to about 100 million tons, or two-thirds of BHP's output.
Fortescue has close ties with China. Its second-largest shareholder is Hunan Valin Iron and Steel Group, which holds a 17.3 percent stake. Industry analysts said the loan arrangement was discussed as early as March, when Valin bought the stake.
Andrew Forrest, Fortescue's founder and chief executive, also earlier indicated his interest in selling Class A shares in China when that market is opened to foreign companies.
"It's possible in the future that funding won't be a problem for any Australian company in which major Chinese companies hold a stake," Zhu said. "The ore companies' expansion plans and sales could both be secured by Chinese steel mills."
China has invested US$56 billion in projects globally to reduce reliance on the big three ore suppliers, according to Bloomberg data. A buying spree in the Australian mining sector by Chinese companies has occurred in the past year, most notably the takeover of Australian iron ore explorer Midwest Corp by Sinosteel Corp.
"The pace of domestic steel companies investing in foreign miners will significantly quicken," Xiangcai Securities analyst Wang Lihua wrote in a note after the China-Fortescue deal.
Benchmark iron ore prices are traditionally set through negotiations between big global producers and users. The China Iron and Steel Association, the chief negotiator in this year's talks with the big three, has agreed to give Fortescue priority in 2010 negotiations.
In a statement, Forrest said the agreement with China breaks a market impasse in the Chinese ore industry that created uncertainty and risk. It "sets a solid platform for Fortescue to deliver increased product into China and affirms our close working relationship with CISA and all Chinese steel mills," he said.
The Chinese steel group has refused to fall in line with other mills in accepting the Rio prices, set in May, only to see spot prices surge as demand recovers.
The Fortescue deal could help save some face for the Chinese steel association, which had previously been demanding a discount of 40 percent or more and was criticized by domestic media including the state media CCTV for not conducting price negotiations in a professional manner.
The Chinese industry group has since scaled back its demands, saying it would use the Fortescue prices as a reference point in talks with the big three producers.
Rio, whose four Shanghai-based executives have been arrested on charges of stealing commercial secrets from the Chinese steel industry, has said it won't let Fortescue set its prices. A BHP senior executive in China expressed a similar view.
Many Chinese mills have already agreed to a temporary 33 percent cut in prices, and analysts said the mining giants won't be in a hurry to settle term prices with China because they can easily get better prices on spot markets now.
Still, the Chinese steel body said the Fortescue deal marks a major step for China, though there is still a long way ahead in exercising its clout.
"China buys more than half of the world's iron ore," said Liu Zhenjiang, a vice chairman of the association. "For such a commodity, major suppliers should consider China's weighting in the market."
Fortescue, Australia's third-largest iron ore miner after Anglo-Australian giants Rio Tinto and BHP Billiton, agreed to supply China with 20 million tons of ore during the second half of this year at a 2 percentage point discount to the 33 percent price cut Rio earlier negotiated with non-Chinese steel mills.
Although the price differential is not wide and the supply volume not large, the Fortescue deal illustrates China's strategy of trying to undercut the monopoly enjoyed by the world's three biggest iron ore producers: Rio, BHP and Brazil's Vale.
"A small difference in prices is obviously not all that China wants from the deal," said Shanghai Securities analyst Zhu Limin. "China is willing to provide financing to help Fortescue ramp up production and to support output growth outside the big three."
Details of the loan were still under discussion.
Under the deal, Fortescue will sell its total production to China by year end. That's only a fraction of China's annual imports of about 500 million tons of the ore used in steelmaking.
In only its first year of production, Fortescue is dwarfed by domestic rivals Rio and BHP, whose output ranks Australia as the world's biggest iron ore exporter. The loans will enable cash-strapped Fortescue, which has delayed expansion, to fulfill its aim of increasing annual capacity to about 100 million tons, or two-thirds of BHP's output.
Fortescue has close ties with China. Its second-largest shareholder is Hunan Valin Iron and Steel Group, which holds a 17.3 percent stake. Industry analysts said the loan arrangement was discussed as early as March, when Valin bought the stake.
Andrew Forrest, Fortescue's founder and chief executive, also earlier indicated his interest in selling Class A shares in China when that market is opened to foreign companies.
"It's possible in the future that funding won't be a problem for any Australian company in which major Chinese companies hold a stake," Zhu said. "The ore companies' expansion plans and sales could both be secured by Chinese steel mills."
China has invested US$56 billion in projects globally to reduce reliance on the big three ore suppliers, according to Bloomberg data. A buying spree in the Australian mining sector by Chinese companies has occurred in the past year, most notably the takeover of Australian iron ore explorer Midwest Corp by Sinosteel Corp.
"The pace of domestic steel companies investing in foreign miners will significantly quicken," Xiangcai Securities analyst Wang Lihua wrote in a note after the China-Fortescue deal.
Benchmark iron ore prices are traditionally set through negotiations between big global producers and users. The China Iron and Steel Association, the chief negotiator in this year's talks with the big three, has agreed to give Fortescue priority in 2010 negotiations.
In a statement, Forrest said the agreement with China breaks a market impasse in the Chinese ore industry that created uncertainty and risk. It "sets a solid platform for Fortescue to deliver increased product into China and affirms our close working relationship with CISA and all Chinese steel mills," he said.
The Chinese steel group has refused to fall in line with other mills in accepting the Rio prices, set in May, only to see spot prices surge as demand recovers.
The Fortescue deal could help save some face for the Chinese steel association, which had previously been demanding a discount of 40 percent or more and was criticized by domestic media including the state media CCTV for not conducting price negotiations in a professional manner.
The Chinese industry group has since scaled back its demands, saying it would use the Fortescue prices as a reference point in talks with the big three producers.
Rio, whose four Shanghai-based executives have been arrested on charges of stealing commercial secrets from the Chinese steel industry, has said it won't let Fortescue set its prices. A BHP senior executive in China expressed a similar view.
Many Chinese mills have already agreed to a temporary 33 percent cut in prices, and analysts said the mining giants won't be in a hurry to settle term prices with China because they can easily get better prices on spot markets now.
Still, the Chinese steel body said the Fortescue deal marks a major step for China, though there is still a long way ahead in exercising its clout.
"China buys more than half of the world's iron ore," said Liu Zhenjiang, a vice chairman of the association. "For such a commodity, major suppliers should consider China's weighting in the market."
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