BHP Billiton, the third-biggest
iron ore exporter, is still negotiating with Chinese steelmakers on the
lump premium for third quarter contracts, after having announced its offer
more than a week ago, several sources at steel mills that buy the ore said
Wednesday.
Two of the steelmakers may be in the final
stages of accepting a premium of "close to" $0.28/dry metric ton
unit, which is 18% lower than the $0.342/dmtu in the present quarter, they
said.
The remainder said they are seeking a lower
premium, citing a narrowing spread between lump and fines in the spot
market due to higher stocks of the former, and what they expect to be
weaker steel fundamentals in Q3.
A premium of $0.28/dmtu would represent a
fixed price premium of $17.64/dmt for 63%-Fe Newman fines and $17.14/dmt
for 61.2%-Fe Mining Area C fines.
One of the sources said the premium should be less than $0.2/dmtu, but
believed that $0.22-0.23/dmtu would be a more realistic level that both
parties could agree to. Another said that a premium of $0.24-0.25/dmtu was
where consensus could be reached.
The price of lump is determined by adding
the premium to the price of fines. BHP's lump premium is negotiated with
customers quarterly, while its fines price is derived monthly or quarterly
based on the average of spot price indexes like the one published by
Platts, its customers have said.
A BHP Billiton spokeswoman said last week
it doesn't comment on pricing.
A source at a Japanese mill said it has
received BHP's lump premium offer for the July-to-September period, which
was higher than $0.28/dmtu. No conclusion has been reached as market
participants are still awaiting negotiations with Rio Tinto, the No.2 iron
ore exporter, to be concluded.
Steelmakers in China said a lower lump
premium is warranted because spot market deals involving lump and fines of
similar iron content have shown a narrower price difference.
One of the mills cited anecdotal evidence
of Pilbara Blend lump having traded in the spot market at just a $7-8/dmt
premium over Pilbara Blend fines, which equates to $0.115-0.131/dmtu
assuming an iron content of 61%.
Another large Chinese mill sold at a loss
90,000 mt of Mining Area C lump it bought via long term contracts on the
spot market to another steelmaker in the fourth week of May at $176/dmt
CFR North China, because it wasn't economical to use it for hot metal
production.
"Nobody's buying lump," said a
third source at a major Chinese mill, who added that mills that have
access to domestic iron ore concentrates would substitute the lump with
pellet. The cost of converting concentrates to pellet is about $10/dmt, he
said.
China's output of iron ore in May reached a
record high of 102.5 million mt, according to National Bureau of
Statistics data.
"We can wait and see," said a
procurement staff member at another major Chinese mill. If the lump
premium remains too high then steelmakers may refuse to buy them, he
added.
JAPAN MILLS AGREE TO FINES PRICE WITH RIO
TINTO
Rio Tinto has concluded its fines price
with Japanese steelmakers at $2.7234/dmtu FOB Australia earlier this
month, down from $2.7638/dmtu in the present quarter, the source said. The
figures match Platts May 31 analysis of what the miner would charge, based
on calculations using the Platts Iron Ore Index.
For the lump premium, Rio Tinto has also
yet to offer a concrete price to Japanese steelmakers, but has indicated
to them that it would be lower than its premium in the present quarter of
$0.3425/dmtu in the present quarter.
"Rio Tinto has a lot of inventory of
lump," the Tokyo-based source said.
Japanese mills, a key group of lump
consumers, tend to seek a longer-term view that places a premium on the
stability of supply in price negotiations with suppliers, another mill
source in Tokyo said.
Short-term market changes should be
considered, but shouldn't form the entire basis of price negotiations, he
said.
"We don't want to go to the level of
marginal players in China," he said. "We need some balance
between short-term market pricing and long-term procurement
[objectives]."
Rio Tinto has reached agreements on the
prices of some products and is expected to finalize them in the next few
days, a separate person familiar with the matter said.
A Perth-based spokesman for the company
said it doesn't announce price settlements.
Source: Platts |