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China shuns Rio Tinto, signs long-term iron ore price with Australia's Fortescue news
17 August 2009

China today sidelined the big global iron ore miners by fixing its long-term iron ore price with Australia's third-largest iron ore miner, Fortesue Metals Group, with a guarantee that Fortescue would be given priority during iron ore price negotiations for 2010.

China's lead negotiator in fixing this year's long-term contract price for iron ore, China Iron and Steel Association (CISA), and Baosteel Group Corporation, the country's largest steel maker, today signed the iron ore supply agreement for 2009 with Fortescue Metals with a 35.02-per cent price cut for iron ore fines and a 50.42 per cent cut for iron ore lumps.

''The agreed price is $0.94 for dry metric tonne unit on an FOB basis and is around 3 per cent lower than the price agreed by other Australian miners with non Chinese Steel mills. This price equates to approximately $55.50 per dry tonne for Fortescue grade iron ore. Fortescue has also agreed a lump price of $1.00/dmtu for high grade lump which is equivalent to approximately $61 per dry tonne FOB,'' Fortescue said in a statement.

Spot prices for iron ore crossed the $100 a tonne last week from April's low of $58 a tonne, which is approximately 59 per cent above the benchmark price agreed by China with Fortescue.

Fortescue chief executive officer Andrew Forrest said, ''This groundbreaking agreement cements the strength of the bilateral relationship between Australia and China in which mutual issues can be resolved and future opportunities identified. It also creates a realistic and agreed iron ore price that delivers value for all parties and provides strong support for Fortescue's continued growth.''

Liu Zhenjiang, CISA's vice chairman, said at a news conference in Beijing today that the association would now negotiate with other miners on the "Chinese model" for iron ore long-term price talks.

The benchmark price agreed today by China is 3 per cent lower than the price settled by Japanese and Korean steel mills with Rio Tinto in May. (See: Chinese steelmakers upset with Nippon Steel's ore price-cut deal with Rio

Rio Tinto had agreed to supply Japan's steelmaker Nippon Steel Corporation with a 33-per cent cut in the contract price of fine ore and a 44-per cent cut in lump ore, which was later agreed by South Korea's steelmaker Posco.

But the 35.02 per cent price cut agreed by China for iron ore fines is far below its earlier demand of a 45 to 50 per cent cut from the big three global miners comprising Anglo Australian miners Rio Tinto and BHP Billiton and Brazil's Vale.

Rio Tinto said in a statement that it does not recognise the contract price agreement arrived between China and Fortesue, but will continue to conduct negotiations with China separately.

A Rio Tinto spokesperson today said in a ststement that the company conducts its own negotiations with its customers globally and is not concerned as to how other miners reach their own agreements.

The benchmark contract system accounts for about 70 per cent of the global trade in iron ore and China, the biggest importer of iron ore with imports of 80 per cent of the ore shipped from Australia, had justified a price cut of 40 per cent on two counts.

First, it said, iron ore prices had been raised by nearly 400 per cent in the past five years of the global boom that led to a demand for steel. Second, it says, the demand for steel was unlikely to pick up in the current year due to the prevailing global recession and economic slump.

Last year, with Baosteel drawing flak from Beijing for agreeing to a record 85-95 per cent annual price increase for iron ore, CISA had taken over this years negotiations for setting the benchmark price for iron ore - a key ingredient in making steel.

The negotiations, supposed to have been concluded in June, led to unprecedented acrimony between China and Rio Tinto, leading to the arrest of Stern Hu, Rio's Chinese-born chief negotiator in the negotiations for this year's benchmark iron ore annual contract prices, and three other employees of Rio last month. (See: China arrests four Rio Tinto employees)

China accused the four Rio Tinto executives of having bribed "key officials" at 16 Chinese steel mills and stealing state secrets related to the ongoing long-term iron ore settlement talks, which violated Chinese law.

China had originally accused them of espionage and bribery, scaling down the formal charges last week to only bribery while dropping the more serious charge of espionage, that could have resulted in life imprisonment.

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China shuns Rio Tinto, signs long-term iron ore price with Australia's Fortescue