Vale's Price Ploy Could Revive India Iron Ore Sales

Vale's demands for an unprecedented mid-cycle hike in term iron ore prices could stem a slide in the Indian spot market, which offers cheap supply for Chinese mills seeking to undermine the Brazilian miner's position.

The spot market for Indian iron ore imports to China has dried up over the past six to seven weeks, wilting in the face of closures by Chinese steel mills, high port stocks, a hike in Indian export taxes and competition from other exporters.

Spot prices in China have dropped 12% in the last month, offering Chinese mills a lower-quality but cheap alternative to term iron ore from Brazil.

Vale informed Chinese customers this week that it was immediately increasing prices by additional 20% points over an earlier agreed annual rise, effectively charging the same as it does for European mills and erasing the traditional Asian discount that offset higher freight costs.

Vale has not confirmed the news and Chinese buyers have not said exactly how they'll respond, but Indian iron ore merchants were hopeful that Chinese mills will fight the demands by cutting shipments from Brazil and buying Indian ore instead.

"Indian ore should become attractive for China, if Vale asks for a rise over their contractual price. Then the market may come back to India," Rahul Baldota, president of the Federation of Indian Mineral Industries, told Reuters.

"But the reality is the market is still bad. There is virtually no demand as of now."

Spot prices for Indian ore in China are now almost equivalent to Vale's term price. That's a sea change from the last few years, when the price for lower quality spot cargoes was well above that of better quality term ore.

"People (Indian exporters), who were quoting prices of $130 per ton FoB only a few days earlier, are now willing to sell for $105," said Sanjiv Batra, chairman of state-run MMTC, one of the largest traders in Indian iron ore.

Vale's new charge effectively adds 20 percentage points to the increase that Asian mills agreed on for 2008, bringing Vale's price rise in Asia into line with that won by Australian miners.

If successful, Vale's term ore would be 12-13% more expensive for Chinese mills than it was under the original 2008 agreement. The extra cost is hard to swallow in the face of falling steel prices and more plentiful spot iron ore supply.

Timing

Vale's timing is poor, since Chinese steel mills appear ready to delay delivery of cargoes in the face of weaker domestic steel markets. Top mills have already cut steel prices, and many smaller ones were shut due to Olympics restrictions and rising costs.

"Right now, Vale's iron ore prices are (more) expensive than other ores in China considering the freight rate. Chinese mills pay higher for the Vale's ores because of the long-term supply agreement," said Zou Jian, chairman of the China Metallurgical Mines Association.

"If they cut the supply and terminate the agreement, Chinese mills can pay less. That would be good."

Chinese mills have individually resisted the demand, but have asked Baosteel to officially negotiate a formal solution to be determined at an industry meeting next week, sources said.

The bearish spot market means they aren't worried about mills breaking rank and inking a separate deal. In at least one case, a mill kept a cargo on the water until Vale agreed not to charge the extra amount, one source said.

"Freights are falling because Chinese mills don't want to import so much ore. Steel prices are down and port stocks are very high," said a shipper.

Even outages in Australia, a major exporter, have failed to shake the spot market from its stupor.

BHP Billiton temporarily shut all its Australian mines on Friday following fatal accidents, cutting the country's output by a third, while Rio Tinto has declared force majeure on some cargoes.

But in the past safety-related outages have rarely lasted for more than a day, suggesting only a minor disruption.

by Biman Mukherji and Lucy Hornby, Reuters.