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Vale evasive over iron ore price hike
Michelle Wiese Bockmann and Jamie Dale - Thursday 4 September 2008
If successful, the cost to ship iron ore from Brazil to China on a capesize vessel would be around $200 per tonne.
This is the same level steel mills were paying several months ago for Brazil’s iron ore when they agreed a groundbreaking freight premium with rival Australian producers.
Last February, Vale agreed a price hike of 65% for the 2008-2009 contract year with steel producers. This took the price of its iron ore from Brazil to $118 to $125 per tonne, depending on which of the two iron ore types are shipped.
Reports now suggest that Vale has asked its Chinese customers for a 20% price increase, which would take the cost to between $141.6 and $150 per tonne.
This would bring Brazil more in line with Australian iron ore producers, who successfully negotiated a groundbreaking freight premium into steep rises for its iron ore.
Asian steel producers now pay 80%-97% more for Australian-sourced iron ore, of $145 and $202 per tonne in a deal negotiated last June, several weeks after shipping freight rates in the spot market hit all-time highs.
The higher cost was to reflect the cheaper price to ship iron ore from Australia.
A Vale statement said yesterday about reports it was seeking a “price adjustment”: “Vale hereby reinforces that as part of its ongoing business, it is constantly dialoguing with clients aiming to reach satisfactory mutual conditions for commercial contracts, involving among other factors, quality, volumes and time for delivery.”
Freight rates have slumped dramatically since Australian iron ore producers negotiated their contract prices.
The cost to ship iron ore from Brazil to China was just over $84 per tonne in late June, taking the total cost, including freight, to steel producers to around $202 per tonne.
On Wednesday, the cost was just over $61 per tonne, making the cost much cheaper, at around $179.3.
Once a 20% increase is factored into current freight prices, the cost would be around $202 - exactly how much the Chinese were paying for Brazilian iron ore several months ago when they agreed the deal with Australia.
Last year Brazil overtook Australia as the world’s largest exporter of iron ore, with exports up by 9.3% to 269m tonnes. That was marginally more than Australian exports of 266.8m tonnes.
China imports about half of the world’s iron ore.
But the timing of Vale’s request, if confirmed, is very strange and comes at a time when China’s iron ore market is softening.
Iron ore stockpiles at major ports are at record levels of more than 70m tonnes.
A lack of activity by China in the last two months in the capesize market is thought to be the main reason behind the fall in capesize freight rates.
The capesize fronthaul route today was $123,538 per day, down from a year high of $283,000 on June 5.
The Pacific round voyage rate today was $78,308, down from its year high of $251,625 on June 5.
Chinese steel demand has also dropped off in August, along with Chinese steel prices.
So any argument based on a fall in freight rates might not be met with much interest from Chinese steel mills.
Castalia Fund Management managing director Philippe van den Abeele told Lloyd’s List that Vale seems to be trying too early to push price talks.
He added that this would not be the right time to ask for more from the Chinese, who will just wait until they have to renegotiate, which is further down the line.
A market analyst told Steel Business Briefing that the timing could suggest that Vale is positioning itself for the 2009 contract negotiations which officially start in November.
Posco, Asia’s third-largest steelmaker, said it has not held further talks with Vale regarding iron ore prices and that their agreement in February remains unchanged.
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