On Monday, November 16, China's third-biggest steelmaker Wuhan Iron and Steel Group (WISCO) signed a long-term iron ore contract with Venezuela's state-run iron ore miner Corporación Venezolana de Guayana (CVG), WISCO has said in a statement on its website.
According to the five-year agreement in question, the prices for the iron ore WISCO purchases from the Latin American company will be based on a separate pricing mechanism from the benchmark prices set yearly by the world's top three suppliers, Rio Tinto, BHP Billiton and Vale. This different pricing mechanism is expected to allow the mill to diversify its raw material sources and obtain a stable and long-term iron ore supply at a cheaper rate than from the three main global miners.
Commenting on the agreement, WISCO said, "This is the first contract to be implemented with a separate pricing mechanism (from the usual yearly agreements). This indicates that China's iron ore purchase prices need not be restricted by the world's top three suppliers."
CVG is the sole iron ore mine in Venezuela with 14.66 billion mt of iron ore resources with grading on par with that of Brazilian iron ore. Its iron ore output is predicted to reach 23 million mt this year, and the entire mine is estimated to hold 4.18 billion mt of iron ores in reserves.
Under the deal, WISCO has the option to buy more of CVG's iron ore output if CVG expands its annual production capacity beyond its current level of 23 million mt. So far this year, the China Iron and Steel Association (CISA) has only negotiated a long-term iron ore price with Australia's third-largest iron ore miner Fortescue Metals Group Ltd. (FMG). The CISA has refused to accept a 33 percent price cut for the long-term prices that steel mills in South Korea and Japan negotiated with the three global iron ore giants, Rio Tinto, BHP and Vale.
To reduce their reliance on Rio, BHP Billiton and Vale, China's steel mills now are eager to buy reliable mining companies overseas.
According to reports, refusing to disclose other details about the agreement, WISCO official Bai Fang told Chinese sources, "In 2010, CVG will sell us iron ore at the China price."
According to analysts' expectations, iron ore prices might jump by 14 percent in 2010 to the second highest level on record.