Baosteel, China steelmakers may have to cough up more for iron ore

Melbourne, May 16 | Updated: May 17 2006, 05:44am hrs
Baosteel Group Corp. and rival Chinese steelmakers, the worlds largest iron ore buyers, may have to pay more for the steelmaking ingredient after Germanys biggest mill accepted a 19% increase. ThyssenKrupp AGs agreement on Monday with Brazils Cia. Vale do Rio Doce, the worlds largest iron ore exporter, traditionally would set a global price benchmark as the first settled. Baosteel is still in talks and hasnt settled prices, chief negotiator Liu Yongshun said on Tuesday.

Chinese steelmakers have prolonged talks this year with suppliers such as Rio Tinto Group and BHP Billiton, refusing to accept a fourth straight gain in prices after 2005s record 71.5% gain increased costs and cut their profits. China may refuse to follow this, but even so, prices are very likely to be settled beyond 10%, Lu Yizhen, head of research at Citic-Prudential Fund Management Co, said in Shanghai on Tuesday. This rate will have a significant impact on the following negotiations.

Iron ore prices soared to a record last year on demand from China, producer of a third of the worlds steel, as Shanghai-based Baosteel, the nations biggest steelmaker, and local rivals increased output. Vale, BHP and Rio control 75%. of the global iron ore trade.

Chinese steelmakers dont want to pay more for supplies, Baosteel chairwoman Xie Qihua said April 17. Still, they may accept as much as a 10% increase, two Chinese steel industry officials said March 28.

This doesnt help the Chinese cause when you see other people settling higher, but I still think they are just such a massive buyer that theyll try and pressure BHP and Rio to keep those rises to around 10-to-15%, said Michael Birch, who helps manage the equivalent of $102 million at Wallace Funds Management.

The increase to be paid by ThyssenKrupp was more than the 12% forecast in a Bloomberg analyst survey.

Chinese steelmakers want a bigger say in setting prices after tripling imports in the past five years and overtaking Japan as the single-largest buyer in 2003. Global benchmark prices have traditionally been set by Japanese or European steelmakers with iron ore producers.

Nippon Steel is also still in negotiations with iron ore suppliers and hasnt settled prices, spokesman Hiroshi Nakashima said by phone from the steelmakers Tokyo headquarters on Tuesday.

Itll be interesting to see what the Chinese and Japanese steelmakers decide on, I dont think they will be happy with the price increase, said Atul Lele, who helps manage about $270 million at White Funds Management in Sydney.

Asian steelmakers are likely to have to accept the price increases, Catarina Pedrosa, head analyst with Banif Investment Bank in Sao Paulo said.