Vale Pushes China for Higher Steel Prices

by: Stephanie Grimmett September 05, 2008 | about stocks: BHP / RIO / RTP    

Stephanie Grimmett

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Remember back last winter, when the BHP Billiton (BHP) bid to takeover Rio Tinto  (RTP) was sending China's steelmakers into a tizzy?

They were terrified that the union of BHP, the third largest iron ore producer globally, and Rio Tinto, the second, would create a de facto monopoly on their industry's most vital raw ingredient. Well, it looks like Chinese steel producers won't have to wait for that most disadvantageous of unions (for them at least) to watch iron ore prices go through the roof.

When yearly contracts were made in February at an 86% increase on last year's prices, China's steel producers gulped so hard they nearly swallowed their own teeth. But that wasn't the end of it. Both Rio Tinto and BHP renegotiated their contracts for even higher prices this summer. And now it's big brother's turn.

Steelmakers in the People's Republic of China just announced that Vale (Companhia Vale do Rio Doce) (RIO), the world's largest iron ore producer, wants to raise prices 13% above the company's 2008 contract prices.

Currently, China's steel industry buys "Southern Systems fines" iron ore from Vale at $1.1898 per dry metric ton (a metric ton is about 10% more than a U.S. ton). That's less than the prices charged by both BHP and Rio Tinto, who get away with charging more because their costs are higher in Australia than Vale's are in Brazil (since when did that matter in a global market?).

According to an official at China's Laiwu Steel, the new price, $1.3441 per dry metric ton, is equal to what Vale's European and U.S. customers already pay for iron ore, which sounds more like fair trade than the "ridiculous" price gouge the Chinese are taking it for.

But what's really odd about the situation is the reaction of Vale's stock. RIO actually sank on the news of possible higher earnings from China. The stock opened sharply lower on Tuesday, and except for a small bounce up on Wednesday morning, it's been sliding ever since. Thursday RIO shares have lost another 6.68% (as of 2:30 p.m.).

Perhaps, investors weren't aware, before now, that Chinese steelmakers were buying their iron ore from Vale, not only at lower prices than Western companies were paying, but also at lower prices than Rio Tinto and BHP Billiton were charging. That's a lot of profits the company could have been collecting and didn't in the last six months.

Disclosure: None

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This article has 8 comments:

  •  
    Sep 05 11:01 AM
    I thought RIO's prices were cheaper to account for the extra costs in shipping long distance as opposed to Australia. In fact, RIO has anticipated these issues by having a solid transportation division of it's own associated with its mines and has ordered several ships particularly to offset shipping's rising costs...

    jegan ;-)
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  •  
    Sep 05 03:53 PM
    When China goes thru its current inventory and starts to buy again, Vale will improve. Should be within 1 month. Be patient.
    Reply | Link to Comment
  •  
    Sep 06 08:19 AM
    Yahoo finance does not seem to cover RIO (Vale)- any other sites that have more information on this company?
    Reply | Link to Comment
  •  
    Sep 06 08:36 AM
    jay c, I just went to Yahoo Finance, my favorite site and home page, and it seem to provide the same amount of information for RIO as it does for any other stock.
    Reply | Link to Comment
  •  
    Sep 06 10:26 AM
    Rio is one of the stocks in my portfolio and I want to thank Stephanie and everyone who took the time to comment,
    Daniel Kowkabany
    Reply | Link to Comment
  •  
    Sep 06 10:49 AM
    yeah it's the distance that the aussies base higher prices on; considerably higher.

    china has been sending a lot of cues out to miners, building a negotiation posture, like a 'woe is me' scenario. someone there has made it known that they may remove baosteel from its position as the ore contract negotiator. they didn't like their work this season. its price fixing but it seems that this is s.o.p. with miners in asia. in fact too is unhappy with their deals and claims they will negotiate separately next year and play the contracts against the spot market which is pretty typical. there're a few other things that make me see a lot of news as posturing.

    actually bhp wants more per tonne and think they got stiffed this year on ore contracts having to go along with deals cut by rio tinto. the nearly double price is insufficient. and so what i see is a heavy dose of saber rattling mixed in.

    by the way, all this has driven industry components into building in verticality so they just have to depend on themselves for materials. i think THAT is the real story.

    here's a question. with talk of inflation, slow downs, deflation, high oil,
    low nat gas etc etc rampant, why are huge companies like rio and mt buying companies like popcorn?? i guess they're pretty stupid and somehow stumbled upon ways to grow; the 'even a blind squirrel finds a nut now and then' theory. maybe they didn't read the news lately? yeah real dumb they are...
    Reply | Link to Comment
  •  
    Sep 06 10:50 AM
    oh yeah, i'm long coal iron ore dry bulk shipping and sid, a more vertical steel outfit.
    Reply | Link to Comment
  •  
    Sep 26 07:30 PM
    The chinese govt appears to be manipulating the qingdao spot market down in an effort to push back on Vale. They are also filing false newsreports via Xinhua et filia regarding Rio's supposed idling of ships (denied by the vastly more reliable Rio CEO). This is high-stakes poker, with the worlds largest industrial economy and the government with the largest forex reserves in the world versus the #2 ore miner and effective nickel monopolist. Clearly China, Inc., has deeper pockets than Vale, but all of the forces of the market are on Vale's side, and it remains to be seen whether China can keep it's industrial base operational if half of their iron supply and all of their nickel supply is cut off. You may have noticed the deteriorating quality of Chinese stainless (due to economizing on nickel). If their industrial capacity is idled nationally, a coup d'etat is not impossible.
    Reply | Link to Comment
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