Rio Tinto Coal Price Cut May Signal Reduction for Brazil Mills

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30 Jan 2009

Rio Tinto Group’s decision to slash coking coal prices for India’s JSW Steel Ltd. before contract expiration may signal Brazilian steelmakers will get similar reductions from suppliers, Raymond James & Associates Inc. said. “This is very positive news for Brazilian steelmakers, even if they don’t get price cuts before their annual contracts expire, because it paves the way for lower prices for this year’s contracts,” said Francisco Schumacher, an analyst at Raymond James, in a telephone interview from Buenos Aires. “Brazilian steelmakers are more competitive than their global rivals when the price of coking coal drops more than iron ore.’
Coking coal prices will be cut 43 percent for the three months ending March 31 to $175 a metric ton, JSW Finance Director Seshagiri Rao said today in Mumbai. The reduction may prompt other steelmakers to press BHP Billiton Ltd., Rio Tinto and other mining companies for cuts in iron-ore and coal prices before contracts expire.
Iron-ore producers and steelmakers have yet to begin talks to settle 2009 prices for the metal, though Chinese steelmakers have been trying to get BHP and Rio Tinto to accept cuts in iron ore prices for the last three months of the contract, according to the China Iron and Steel Association.
‘‘Because of a slump in demand and lower prices for raw material in general, we expect 2009 coking coal prices to decrease 42 percent,’’ Schumacher said. ‘‘Iron-ore prices may drop only 10 percent.’’
Output Drops
The BHP Billiton Mitsubishi Alliance, the world’s largest coking coal exporter, shipped 20 percent less of the fuel from its largest Australian port last month. BHP, Rio and Xstrata Plc have all cut coking coal output at Australian mines in the past two mines.
Coking coal accounts for 22 to 25 percent of costs for Brazilian steelmakers, while iron-ore represents about 12 percent on average, Schumacher said.
The world’s steelmakers are pushing for the first price cut in contract iron-ore prices in seven years following a collapse in steel prices from record highs last July. Sao Paulo-based analysts Pedro Galdi of SLW Corretora and Rogerio Zarpao of Uniao de Bancos Brasileiros SA said Jan. 21 they now expect falls of 15 and 20 percent, respectively, in Cia Vale do Rio Doce’s iron-ore contract prices this year.
Banco Santander SA analysts said yesterday that iron-ore contract negotiations may ‘‘surprise on the upside.”
Holding Off
“The miners are going to hold off as long as possible before making a settlement in the hope market indicators may improve,” said Galdi.
Gerdau SA, Latin America’s biggest steelmaker, fell 0.1 percent to 15.34 reais at 11:13 a.m. New York time in Sao Paulo trading, after rising as much as 1.9 percent earlier. Usinas Siderurgicas de Minas Gerais SA, Brazil’s second-largest steel company, supplier, rose 0.9 percent to 29.34 reais. Cia. Siderurgica Nacional SA, the third-biggest steelmaker, slipped 0.3 percent to 36.97 reais.
Vale, the world’s biggest supplier of iron ore, dropped 1.8 percent to 28.83 reais, the first decline in five days.

Source: Bloomberg