26/05/2009 - 11:20

Rio agrees to 37% iron ore price cut

26/05/2009 - 11:20

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Rio Tinto has agreed to a "realistic" cut of more than a third in iron ore prices with Japan's biggest steel maker, as its customers face up to challenging market conditions.

Rio agrees to 37% iron ore price cut

Rio Tinto has agreed to a "realistic" cut of more than a third in iron ore prices with Japan's biggest steel maker, as its customers face up to challenging market conditions.

Rio Tinto has settled new 2009 contract prices for fine and lump iron ore from its Hamersley Iron operation with Nippon Steel Corporation.

In a move that could pressure other major iron ore producers to accept similar prices, the price of fines from the Pilbara and Yandicoogina will fall by about 33 per cent to 97 US cents per dry metric tonne unit (dmtu), from 144.66 US cents in 2008.

The price of Pilbara blend lump will fall by 44 per cent to 112 US cents per dmtu, from 201.69 US cents.

Under the deal with Nippon, iron ore prices will fall by 37 per cent on a weighted average basis.

Rio Tinto iron ore chief executive Sam Walsh said the company was pleased to reach the agreement.

"We believe this settlement is a realistic outcome for both parties - one that reflects the global market for iron ore and the current challenging market conditions facing our customers," Mr Walsh said in a statement.

The prices apply for the contract year beginning April 1, 2009.

The Western Australian government had forecast a 30 per cent decline in iron ore prices this contract year and with an estimated exchange rate of 68.5 US cents, the state's projected royalty income from iron for fiscal 2010 is just over $2 billion.

The government is expecting iron ore royalties of $2.2 billion this financial year.

BT Investment Management resources analyst Tim Barker said the new contract prices were higher than some commentators had tipped and that other producers would probably follow Rio Tinto's lead.

"I would suspect that we will see the Japanese, Koreans and Taiwanese settle in line with these figures and it will probably be with most of the producers," Mr Barker said.

But Chinese steel makers would probably hold out for a better deal and not simply accept the settlement as a benchmark.

"I don't think there will be a quick settlement with the Chinese," Mr Barker said.

"It will be interesting to see what their specific comments are in this particular set of circumstances."

The prices negotiated by Rio Tinto come after last year's rates, negotiated amid a soaring commodities market, increased 86 per cent on those seen in 2007.

Japan is Rio Tinto's second largest market. It took about 55 million tonnes of iron ore last year, behind the 100 million tonnes sold to Chinese companies.

The China Iron and Steel Association, whose 119 members account for more than 90 per cent of China's steel production, have previously said mills in the country want prices to be cut by 40-45 per cent.

Meanwhile, Mr Walsh on Tuesday said Rio Tinto's iron ore operations had been running "flat out" in recent weeks after a fall in Chinese production.

Mr Walsh said a dip in capacity of 140 million tonnes in China since June last year had been a good opportunity for Rio Tinto.

"For the last six weeks our operations have been running absolutely flat out," Mr Walsh said on the sidelines of minerals conference in Canberra.

Shares in Rio Tinto finished on Tuesday up $1.38 at $65.46.

 

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