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BHP Still in Talks on Q3 Iron Ore Lump Premium, Rio Tinto Yet to Offer

https://en.steelhome.com [SteelHome] 2011-06-16 16:46:15

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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

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