Japan Major Steels, Rio Tinto Agree to Cut Iron Ore Price by 33% for F2009

Nippon Steel, JFE Steel and other Japanese integrated steel makers agreed on Tuesday to reduce iron ore purchase price by around 33% for fine ore from Rio Tinto’s Australian operation for fiscal 2009 started April from fiscal 2008. The price decreases for the first time in 7 years while the reduction is less than increase last year. The settlement is expected to be benchmark but the reduction could be lower for Brazil ore after Brazil ore price increase in fiscal 2008 was less than Australia ore. The reduction could reduce annual Japanese iron ore cost by around 200 billion yen from fiscal 2008 depending on the coming negotiation. The cost for major iron making raw materials decreases by around 800 billion yen.

Sinter feed fine ore represents major part of iron ore requirement for integrated steel makers when processed ore including sinter ore represents around 80% of the total iron ore consumption by integrated steel makers. The new price is 97 US cents per dry metric ton unit for Pilbara blend fine ore, which is 32.95% lower than fiscal 2008 and represents US$ 60.14 per tonne for ore with 62% Fe. The price decreases by 44.47% to 112 US cents per DMTU for Pilbara lump ore. The price gap between fine and lump decreased to 15 US cents from 57.03 US cents.

Steel makers expected iron ore annual contract price would decrease to less than fiscal 2007 level under very slow economy. However, the new fine ore price is still 20% higher than fiscal 2007 level. The price is 3.5 times of fiscal 2002 level. Chinese firm demand apparently impacts on the settlement when Chinese iron ore import renewed the monthly high for 3 months in a row since February while world seaborne iron ore trade is expected to decrease by 6% to 790 million tonnes level in 2009 from 2008.

Japanese integrated steel makers will negotiate with BHP Billiton of Australia in coming days while the makers would also negotiate with Vale of Brazil. Vale agreed with Japanese steel makers to increase the annual fine ore price by 65% in fiscal 2008 from fiscal 2007 but then Australian miners agreed with Chinese steel makers to increase the price by 79.88%. Vale couldn’t agree to reduce the price as much as Rio Tinto for fiscal 2009 after Vale was forced to sell ore at lower price than Australian ore.

Japanese iron ore cost couldn’t decrease by 200 billion yen level for fiscal 2009 from fiscal 2008 depending on the coming negotiation. The steel makers already settled coking coal price getting estimated 600 billion yen level of lower cost. The lower cost in fiscal 2009 should be much smaller than 2.3 trillion yen level of cost up for raw materials, energy and freight Japanese major 5 steel makers in fiscal 2008 from fiscal 2007.