Following Australian miner Rio Tinto's announcement of a 33 percent cut in fine iron ore contract prices with Japan's largest steelmaker Nippon Steel, it is reported that Rio Tinto has settled its 2009 benchmark price with Japan.
As per reports, the other Japanese steelmakers, including JFE Steel, Kobe Steel and Sumitomo Metals, have also settled iron ore contract price at US cents 97 per dry metric ton unit for Pilbara Blend and Yandicoogina fines, down by 33 percent, and at US cents 112 per dry metric ton unit for Pilbara Blend lump, down by 44 percent.
Meanwhile, South Korea's largest steelmaker POSCO is still in talks with Rio Tinto. The company is likely to accept the same 33 percent cut in fine iron ore prices, which would mean that the cut in question would move one step closer to being accepted as a global benchmark.
Nevertheless, no official confirmation has yet been received as regards the Japanese companies or POSCO.
However, the focus is now on whether China, buyer of more than half of the iron ore traded globally, will accept the abovementioned settlement as a benchmark for the year or will instead insist on further price reductions. The new deal threatens to undermine China's demand for deeper cuts and its position as benchmark setter for Asian term prices.
China is weighing whether it is better to accept the deal to secure stable long-term supply of iron ore or to switch to the spot markets which currently offer better pricing compared to benchmark deals, sacrificing the supply security that underpins the annual deals. Even if the Asian mills stick to the traditional benchmark, China's absence will seriously weaken the system.
The China Iron and Steel Industry Association (CISA) is discussing "counter measures" to respond to the agreement between Rio Tinto and Nippon Steel. CISA secretary general Shan Shanghua has said that the CISA is still studying the issue and has not reached a conclusion yet.
Meanwhile, CISA executive director Zou Jian said, "There's a possibility that we will persist with our request for price cuts of 40 percent to 45 percent but, whether or not that will happen, I cannot tell you now."
Last week, Brazil's Vale, the world's biggest iron ore producer, said it was waiting for Australian rivals BHP Billiton Ltd and Rio Tinto to reach an accord before deciding on its prices for the year. A BHP spokesperson declined to comment on the progress of BHP's iron ore talks with customers.