Rio seeks iron ore premium from China steel mills under long-term agreements: sources

Source:Reuters Published: 2016/11/30 23:18:40

Australian miner Rio Tinto is asking Chinese steel mills to pay a premium for its highest grade iron ore product for the first time since an annual pricing system collapsed in 2010, two sources familiar with the situation said.

The demand by the world's No.2 iron ore miner comes as Chinese steel producers recover from years of losses, buoying demand for iron ore, but it could revive tensions between miners and mills over pricing.

Rio is seeking up to $1 per ton more than the index price for its Pilbara iron ore product, or PB fines, from Chinese mills on long-term contracts for 2017, the sources said. That would be a break from a years-long trend of pricing at spot values. Previously, Rio sold the ore at a premium only to traders.

The miner has also pushed up the premium it seeks from traders to between $2 and $2.50 per ton over the index price for the same product for January to April, they said.

That would be a record high and up from a premium of $1.50 for the four-month period through December this year, said one of the sources, who works closely with Rio in China.

From Chinese mills, Rio initially sought a 15-cent premium, but this week the company increased it to about $1, according to the same source.

"The steel market is so hot this year and they think it's something that buyers can accept," the source said. "If Rio gets it, other miners may follow."

Rio Tinto declined to comment.

A reduction in China's steel capacity along with a push to spend more on infrastructure contributed to an 81 percent spike in Chinese steel prices this year, sparking a similar rally in iron ore prices.

After four decades of fixing iron ore contract prices annually, the miners and mills in 2010 began setting them more frequently and in shorter periods against spot index prices such as those published by Platts and Metal Bulletin.

"This is illogical," said the second source on Rio's planned premium for mills.

"The index already reflects the spot market, why add a premium?" added the source.

The spot index breached $80 a ton on Monday for the first time since October 2014, gaining 86 percent this year after a three-year slide.

A unnamed senior official from the China Iron and Steel Association (CISA) called the planned price markup "unfair," according to a report by the Xinhua News Agency on November 18.

Li Xinchuang, vice-secretary general of the CISA, said "currently it's not easy to demand" a premium for iron ore from Chinese mills.

"The steel market is still very weak, not only in China but globally," Li told Reuters by phone.


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