By staff reporters Zhang Boling and Yan Jiangning

(Caijing.com.cn) The semi-official China Iron & Steel Industry Association (CISA) is willing to accept a price cut on iron ore contracts to March 2010 of less than 40 percent, a person familiar with the matter told Caijing.

The person, who attended an internal meeting of the association, said Chinese steelmakers will continue to reject the 33 percent price reduction agreed between global miners and mills in Japan and South Korea.

CISA has held no substantial talks over iron ore contract prices with BHP Billiton, Rio Tinto or Vale over the past two weeks, the person added.

Global miners usually start discussions with steelmaking blocs in Japan, China and Europe in November to settle iron ore contract prices before the start of the Japanese fiscal year in April.

Negotiations have been particularly tense this year after benchmark steel product prices fell by up to 37 percent in China from the second half of last year, contributing to a combined loss of around 3.3 billion yuan for the country's 72 major steelmakers in the first quarter.

The steelmakers have maintained a consistently hard line on price negotiations, refusing to give ground in the run up to a June 30 deadline for the conclusion of talks.

However, major steelmakers posted combined profit of 1.3 billion yuan in May, ending a seven-month losing streak after a recovery in demand and prices, Caijing reported June 29.  

The turnaround, coupled with rising iron ore spot prices, has strengthened Chinese mills' balance sheets and weakened their leverage in seeking steep iron ore price cuts.

An official with Hebei Iron & Steel Group told Caijing that the 33 percent cut on 2009 term prices would roughly equate to the current spot price, allowing domestic steel mills to turn a profit given the increase in steel products prices.

The domestic steel product price index stood at 98.14 at end-May, up 2.7 percent month-on-month, CISA said. The 2009 contract price for Pilbara ore delivered to China stood at US$78.59 per ton on June 30, while the spot CFI price for the same grade ore hit US$82.29 per ton.

Xu Xiangchun, an industry analyst with consulting firm Mysteel, also told Caijing that CISA should lower their expectations given the improved conditions for steel companies.

"It was reasonable to hold out for price cuts of at least 40 percent when steelmakers were making losses across-the-board, but now it seems retrograde to continue to hold out for such a steep cut after mills have returned to profit," he said.

The possibility of concessions could end a protracted period of wrangling that begin in earnest on May 26 when Australian miner Rio Tinto announced that it had struck a deal with Nippon Steel for a 33-44 percent cut in iron ore contract prices for the fiscal year ending March 2010.

The agreement was the first to come out of this year's round of iron ore price negotiations, and in most years would have been accepted as a global benchmark.

The two parties agreed to a price of US$0.97 per dry metric ton for Pilbara and Yandicoogina iron ore fines, compared with US$1.446 last year.

Other steelmakers, including those in Taiwan later agreed similar price cuts.

CISA rejected the 33-44 percent reduction saying that the price cut did not reflect the true conditions of supply and demand on the international market, and would inflict enormous losses on Chinese steelmakers.

Shan Shanghua, secretary general of the CISA, at the time said that Chinese steelmakers would not back down from their request for a reduction of at least 40 percent for 2009 contract prices, which would be roughly equivalent to term contract prices for 2007.

The association also threatened to instruct smaller mills to reduce their output if they did not obtain the desired price concessions.

China produced 46.5 million tons of crude steel in May, up 0.6 percent year-on-year, while daily crude steel production reached a five-month high of 1.5 million tons.

1 yuan = 14 U.S.cents

Full article in Chinese: http://www.caijing.com.cn/2009-06-30/110191392.html