Iron ore price negotiations - Chinese mills unlikely to be first to bend to Vale

It is reported that Chinese steel mills are unlikely to be the first among Asian steel mills to accept Vale's recent price hike request due to their low number of contracts of affreightment and access to alternative domestic iron ore sources.

Mr Zeng Jiesheng an analyst with Mysteel said that "The current confrontation between Vale and its Asian clients has put the most pressure on Japanese and South Korean steel mills, as they hold CoAs accounting for in excess of 90% of their planned annual transport volume. For Chinese steel mills, the proportion stands at only 25%." He said that "In case the shipments nailed down by the CoAs cannot be completed because steel mills reduce their iron ore purchases from Vale, Asian steel mills, Japanese and South Korean ones in particular, will still have to pay the entire sum as previously agreed and thus suffer a loss from the CoAs." Mr Zeng said he believes that Japanese and South Korean steel mills will be eager to end the confrontation so as to avoid possible losses. He said that "Meanwhile, the loss that would arise from their acceptance of the average USD 10 per tonne hike asked by Vale can be easily covered by their approximately USD 20 per tonne freight rate advantage with the CoAs against spot charter prices This too may encourage Japanese and South Korean steel mills to act first." Mr Zeng said "The other factor that allows Chinese steel mills to stand firm in their position for a longer time than others stems from their ability to turn to domestic iron ore suppliers instead of Vale. This contrasts with their Japanese and South Korean counterparts and their nearly 100% dependence on imported ore." As per reports, Vale recently moved to raise its benchmark price for long term contracted iron ore supplies for Asian steel mills for the remainder of the 2008/2009 contract year to equal that of their European clients.
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