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Posco nod for Rio price cut

(China Daily)
Updated: 2009-05-29 09:33

Posco, Asia's third-largest steel mill, agreed to a 33 percent cut in iron ore prices with Rio Tinto Group, the world's second-biggest supplier, adding to pressure on Chinese mills to accept it as a benchmark.

The agreement matched the prices that London-based Rio agreed on May 26 with Japanese steelmakers, Choi Youn Joung, a spokeswoman for the Pohang, South Korea-based company, said yesterday by phone.

Posco joins its larger rivals Nippon Steel Corp and JFE Holdings Inc in accepting the second-highest annual contract price on record. Mills in China, the world's biggest steel producing nation, haven't reached agreement and have previously called for a cut of as much as 50 percent as steel demand shrinks with the global recession.

Chinese mills should push for a bigger cut because there is an oversupply of ore, Shen Wenrong, chairman of Jiangsu Shagang Group Co, China's fifth-largest producer, said yesterday in an interview.

Related readings:  Rio Tinto planning iron ore price cuts  China steel makers, iron ore suppliers avoid price talks  Rio to sell stake in China JV  China imports record volume of iron ore in March

"When you have the biggest Korean steelmaker and the biggest Japanese steelmaker agree, it is going to make it hard" to resist, James Wilson, a resources analyst at DJ Carmichael & Co, said by phone from Perth. Recent improvements in steel prices in the US and higher iron ore imports by China in the past five months make it harder to argue for a bigger cut, Wilson said.

Posco agreed to pay 97 cents a dry metric ton unit for iron ore fines, down 33 percent from a year ago. The price of iron ore lump dropped 44 percent to 112 cents. Lump ore is easier for some steel mills to process than fines. The three major producers, including BHP Billiton Ltd and Vale SA, account for 85 percent of Posco's iron ore imports.

Talks with BHP and Vale are continuing, Posco's Choi said.

The price cut, the first in seven years, will reduce costs for Posco, which cut production for the first time in its 41-year history in December, according to Kim Gyung Jung, an analyst at Samsung Securities Co.

"Overall cost of raw materials, including coal, may fall about 50 percent from a year ago, bigger than steel products price cut," Kim said. "This will definitely push up Posco's earnings."

Posco said on May 14 annual sales may be pared by 2.7 trillion won ($2.1 billion) following steel price cuts of as much as 20 percent amid weakening demand. The mill, which gets about 70 percent of its sales from Korea, cut prices for hot-rolled coil to 680,000 won a ton from 850,000 won.

Bloomberg News