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China Turning the Screws on Rio Tinto in Iron Ore Negotiations

Companies / Metals & Mining Aug 21, 2009 - 12:08 PM GMT

By: Money_Morning

Companies

Bob Blandeburgo writes: China is pressing Rio Tinto PLC (NYSE ADR: RTP) hard for a sharp reduction in the prices the company charges for its iron ore. But mining companies like Rio, who have had their bottom lines eviscerated by a slump in commodities prices, may have a hard time acquiescing.



China's 470 million ton demand for steel is considerably lower than the country's annual production capacity of 660 million tons, and to that effect, China announced a three-year ban on new mills The New York Times reported.

 "Disorderly competition" has pushed up iron ore prices, caused a glut of production capacity and resulted in "serious losses," said China's Information Minister Li Yizhong. "My ministry will not approve any expansion-related projects in the iron and steel industry. I would like to call on the whole industry, all iron and steel producers, not to construct any new projects within three years."

China is using its clout as the world's largest steel producer to negotiate lower iron ore prices with some of the larger ore producers, but six weeks after the last agreements expired at the end of June talks are still deadlocked.

Beijing is showing it can and will shop around for the best prices it can find, inking an iron ore deal Monday with Fortescue Metals Group Ltd. that gives the Red Dragon prices 3% below a benchmark set by Rio Tinto with Japanese, Korean and Taiwanese steelmakers.

Still, the Fortescue contract covers only 18 million metric tons of ore, compared to the tens of millions of metric tons Rio Tinto and BHP Billiton Ltd. (NYSE ADR: BHP) have earmarked for the second half of this year.

"The price Fortescue is getting should not be taken as indicative of what Rio and BHP will get," H3 Global Advisors Director of Commodities Funds Manager Mathew Kaleel told Reuters. "In terms of volume there's no comparison"

Rio Tinto agreed with Japanese and South Korean steel mills to cut prices by 33%, but negotiations with China stalled when the China Iron & Steel Association demanded a deeper price cut. China is still receiving iron ore on long-term contracts with provisional pricing terms based on the 33% cut, Rio Tinto Chief Executive Officer Tom Albanese said yesterday in a conference call.

It may be difficult for Rio Tinto to bend too far on pricing, as the company saw its profit drop to $2.5 billion in the first half. Operating income at Rio's iron ore division, its biggest profit generator, fell to $1.9 billion in the first six months of the year.

Chinese iron ore imports rose to their highest level ever as prices swooned in July.

The $300 Trillion �Money Bang� Keith Fitz-Gerald and his team have just produced a groundbreaking report that shows how this historic �Money Bang� is gaining steam. You�ll find out why China is investing $200 billion in one company � and why it�s expected to gain 356%� Why the Dept. of Energy is �backing� one solar company � and why it�s 506% revenue jump is a �smidgen�� And why one recently IPO�d water company is headed for a 600% run. Just go here for details.

Money Morning/The Money Map Report

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