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Rio Tinto Strikes Deal with Nippon Steel for Lower Iron Ore Prices

Strategic Insights

— 1 min read

Rio Tinto Ltd. has secured a deal with Japan's Nippon Steel Corp. for a 33% to 44% decrease in iron ore term prices for the 2009-10 contract year. This agreement marks the first iron ore price settlement of the year, although other major miners and key consumers, such as Chinese steel mills, are still negotiating prices. The price cut, announced on April 1, is not as deep as Chinese steel makers had been pushing for, and it remains to be seen if the Chinese side will accept the settlement as a benchmark for the year or seek further reductions.

Key Takeaways:

  • Rio Tinto and Nippon Steel agreed on a 33-44% drop in iron ore term prices for the 2009-10 contract year, which started on April 1.
  • The price of iron ore fines was set at 97 U.S. cents per dry metric ton, compared to US$1.446 last year, and US$1.12 a ton for lump, down from US$2.0169 last year.
  • Rio Tinto Chief Executive Sam Walsh stated that the settlement is a "realistic outcome for both parties, one that reflects the global market for iron ore and the current challenging market conditions facing our customers."
  • Chinese steel makers, led by Baosteel, are still pushing for a price cut of 40-45% to reflect weaker market conditions.
  • The China Iron and Steel Association has said Chinese mills would not accept a benchmark price cut of less than 40% if set offshore.
  • The price of iron ore fines agreed upon by Rio and Nippon was higher than the market had been expecting, which is positive for all iron ore miners.

Statistics:

  • 97 U.S. cents: the agreed price of iron ore fines in the 2009-10 contract year.
  • US$1.446: the price of iron ore fines in the 2008-09 contract year.
  • US$1.12: the agreed price of iron ore lump in the 2009-10 contract year.
  • US$2.0169: the price of iron ore lump in the 2008-09 contract year.
  • 33-44%: the range of the price drop in iron ore term prices agreed upon by Rio and Nippon.
  • 40-45%: the desired price cut range pushed for by Chinese steel makers.

Sources:

  • Dow Jones Commodities News via Comtex, "Rio Tinto Strips Higher Percentage Rise in Iron Ore," May 26, 2009.
  • Dow Jones Newswires, "Rio Tinto Strikes Deal with Nippon Steel for Lower Iron Ore Prices," May 26, 2009.

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