Vale to Seek Higher Iron-Ore Prices in Asia
September 7th, 2008 | by mantrionline |Brazil’s Companhia Vale do Rio Doce, the world’s largest iron-ore mining company, this week notified some Asian steelmakers it intends to seek a 20% price increase for contracts it had renegotiated in June.
While the steelmakers privately say they will protest the increase by not paying or finding other suppliers, analysts said the protests are unlikely to succeed. Steel-intensive cars, appliances and construction equipment could get more expensive if, as expected, the companies accept and pass rising costs to their customers. In recent weeks, steel prices have fallen because of a slowing world economy, but the mills are likely to curtail some production to tighten supplies and firm prices.
According to a copy of the letter viewed by The Wall Street Journal, Rio de Janeiro-based Vale said it intends to increase iron ore, to prices 86% and 92% higher than its 2007 contract prices. The new prices are effective for shipments after Sept. 1. In June, the miner and Asian steelmakers had agreed to a price rise retroactive to April of between 65% and 71%. However, chief rivals BHP Billiton and Rio Tinto PLC in July demanded and received a retroactive, average 85% price increase.
A Vale representative declined to comment on the existence of the letter. In the past, the company has said that it is always having private conversations with its customers about contract terms.
Vale sells more iron ore than any other company in the world. Nearly 70% of its revenue is from iron ore, helping it post record profits this year. But the company is also a huge supplier of nickel, which accounts for about 25% of its revenue. Nickel prices have fallen through the floor, trading now at about half of their value since April. That drop was a drag on its earnings in the latest period.
Separately, Melbourne, Australia-based BHP said it was suspending its iron-ore operations in Western Australia because of two mining fatalities there. There was no immediate determination when operations would restart. If BHP’s operations remain closed for several days, the world’s supply of iron ore may get tighter.
Analysts say that Vale is trying to capitalize on its iron-ore market dominance while demand for steel to build bridges, buildings, cars and appliances is relatively strong in emerging economies. The company has said it wants to diversify by constructing steel mills, acquiring aluminum assets and perhaps buying other metals and mineral companies.
Chinese steelmakers acknowledge that their existing contracts with Vale may end up costing more than initially thought. According to terms of some contracts, Vale can hold back some of the iron ore it agreed to sell steelmakers, typically about 10%, and sell it on the spot market, at what is typically a higher price. Steel makers generally agree to such terms because in softer markets, they don’t want to be stuck with extra iron ore.
“Vale is allowed to sell 10% or a certain portion of its iron ore on the spot market only if they didn’t break any terms in the contract,” said a spokesman for Wuhan Steel Group. “We also will choose a cheaper supplier in the spot market to buy the raw material if we need more.”
Some steelmakers in China are protesting, saying that Vale’s bid is ill-timed and won’t stick because steel sales have slowed and stockpiles of iron ore are plentiful.
“I don’t think China’s steelmakers will accept the renegotiation since the demand for steel has shrunken recently,” said Hu Hao, an analyst at Shanghai-based Central China Securities. “Many steelmakers face the chilly cold right now,” he said. “They cannot pass on the price hike easily to downstream customers.”
