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China Accepts Ore Cut, May Allow Rio Talks to Lapse (Update4)

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By Bloomberg News

July 15 (Bloomberg) -- Major Chinese steelmakers have accepted a temporary

33 percent iron ore price cut from Rio Tinto Group, and may allow annual

contract talks to lapse, Umetal Research Institute said.

Some of the nation’s largest mills have accepted a “provisional” 33

percent price cut offered by London-based Rio, the world’s second-largest

producer, said Shanghai-based analyst Hu Kai, declining to name the

steelmakers. He said there may be no official announcement about the price

agreement.

The China Iron and Steel Association, leading the talks, sought a discount

of as much as 45 percent after its mills posted losses, more than the 33

percent cut agreed by Japanese and Korean steelmakers. China detained four

Rio executives on July 5 for allegedly stealing state secrets that it said

harmed the nation’s economic interest and security.

“Rio is unlikely to budge on the price cuts because of the arrests as it

won’t be consistent with its business practices,” Hu said. “The talks may

end quietly as steelmakers accept the 33 percent as a provisional cut.”

Rio’s shares rose 1 percent to A$49.63 as of 1:05 p.m. Sydney time on the

Australian stock exchange.

Chinese authorities last week said they had evidence that Rio employees,

including Stern Hu, an Australian citizen and head of iron ore operations in

China, stole state secrets. China is accusing Hu of bribing steel

executives during iron ore price talks, Australia’s Foreign Minister

Stephen Smith said July 10.

All Measures

Australia is taking all measures possible to ensure the well-being of Hu,

Prime Minister Kevin Rudd said today. Foreign Minister Smith will meet with

a Chinese vice foreign minister tomorrow in Egypt to discuss the detention

of Hu, Rudd said.

This year’s price talks between China and iron ore producers began in

January, and passed the June 30 deadline without an agreement, becoming the

longest-running in the 40- year history of setting annual prices for the

steelmaking material. The 33 percent cut is the first drop in prices in

seven years.

Hebei Iron & Steel Group, China’s second-biggest mill by 2008 output,

accepted the provisional cut while the talks were continuing, Tian Zhiping,

Hebei’s vice president, said last week in an interview.

The price talks are ongoing and may conclude soon, Zou Jian, a former

chairman of the China Metallurgical Mining Enterprise Association, said

today in Beijing. Zou cited information from the China Iron & Steel

Association for his comment.

Settlement Price

Shan Shanghua, secretary general of the Chinese steel association, couldn’t

be reached for comment. Nick Cobban, a spokesman for Rio in London,

declined to comment.

The contract price for the benchmark Rio product was settled at about $61 a

metric ton, excluding freight costs, for Japanese and Korean mills. Shipping

the ore to China’s Qingdao port from Western Australia would cost about $

13.32, according to the Baltic Dry Index.

The price of iron ore for immediate delivery to China rose 5.5 percent to $

87 a ton, including freight costs, for the week ended July 10, according to

Metal Bulletin.

Vale SA, BHP Billiton Ltd. and Rio Tinto have trimmed spot sales to China to

ensure supplies to customers in Europe, Japan and South Korea which have

agreed to the contract prices, Umetal said last week, leading to higher cash

prices in China.

‘Swing Back’

“The steelmakers may swing back to buying from spot should the cash market

fall in the future,” Umetal’s Hu said.

Rio’s sales on the spot market were continuing, spokesman Ian Head said

from Melbourne today. The Financial Times reported Rio and BHP stopped

putting spot iron ore shipments up for bid, citing the Steel Business

Briefing.

“It’s business as usual,” Head said. The report was “not correct,” he

said. BHP Billiton spokeswoman Samantha Evans declined to comment on the

company’s spot sales into China.

Executives from 16 Chinese steel mills taking part in iron ore talks this

year received payments from Rio employees, China Daily newspaper reported

today, citing an industry “insider” it didn’t identify. Rio’s Head

declined to comment on the report.

Laiwu Iron & Steel Group’s shipping executive Wang Hongjiu was “taken away

” by authorities on suspicion of providing information to Rio’s employees

including Hu, the 21st Century Business Herald said today, without citing

anyone.

Rio had relocated mid-level and junior expatriate staff from its Shanghai

office to Hong Kong and Singapore before the arrest and detention of Hu, the

Australian Financial Review reported today. Rio’s Head declined to comment.

--Helen Yuan, Rebecca Keenan, Xiao Yu, Brett Foley, Gemma Daley. Editors:

Tan Hwee Ann, Keith Gosman.

To contact the Bloomberg News staff on this story: Helen Yuan in Shanghai at

[email protected]

Last Updated: July 14, 2009 23:11 EDT