Chinese steelmakers, the world's largest buyers of iron ore, will reject Rio Tinto Group's demand for a minimum 71% price increase in the raw material, two people familiar with the negotiations said.
The mills will only accept a 65% price gain for ore from London-based Rio's mines in Australia, said the people who declined to be identified because the talks are confidential.
Rio wants the bigger increase to match the 71% jump that Brazil's Cia. Vale do Rio Doce, the world's largest exporter of the ore, won this week from Asia's three biggest mills for its premium Carajas grade. Contract prices have risen in the past five years to a record, driven by demand from China, the biggest steelmaker and the fastest-growing major economy.
''If they concede too easily on the Carajas price, that may open the doors for possible further changes down the track,'' Mark Pervan, a senior ANZ commodity strategist, said. The mills ''have gone and changed the rules for the Brazilians, so the Australians by all rights should be pushing hard for at worst the top price they have struck with Brazil,'' he said.
Australian producers are in a ''strong position'' to secure at least a 71% gain, Merrill Lynch analysts, led by Vicky Binns, said in a February 18 report. Rio and BHP Billiton, the world's biggest mining company, produce ore at a similar grade to that of Vale's Carajas mine, Merrill said.
Rio Tinto, the second-largest exporter of iron ore, is also demanding that Asian mills pay a freight premium to reflect the lower cost of shipping ore to Japan and China from Australia than Brazil, where Vale is based. It costs about $20-$30 a tonne less to ship ore from Australia than Brazil.
Chinese steelmakers have also rejected paying a freight premium, the two people said. BHP, the world's third-largest iron ore exporter, failed to win a freight premium in talks three years ago.
Rio Tinto will meet Chinese steelmakers for further talks next week, the people said. Talks with steel mills are continuing, Rio Tinto spokeswoman Amanda Buckley said from Melbourne, declining to be more specific. BHP spokeswoman Samantha Evans declined to comment on the negotiations.
''We may be talking weeks, three to four,'' before prices may be settled, Mr Pervan said.
Meng Haibiao, a spokesman for Baosteel Group, China's largest steelmaker, declined to comment on the price talks.
Meanwhile, Many small and medium-sized Chinese steelmakers have already raised their prices in anticipation of a price rise by Baosteel, due to higher iron ore prices.
Analysts expect steelmakers to use a higher-than-expected rise in iron ore prices as a pretext for raising their own prices, easing pressure on profit margins in the world's largest steel industry.
The official China Daily reports that producers, including Jiangsu Shagang Group, Laiwu Steel and Baotou Steel, had already raised prices on a range of steel products in anticipation that Baoshan Iron and Steel (Baosteel) and Shougang Group would do so possibly as soon as this week.
It quoted an unnamed industry source as saying Baosteel had already decided in an internal meeting on Thursday to raise its prices, and that the new price would fully cover its cost increases resulting from the expected 65% increase in iron ore prices.
It did not specify by how much it would raise prices.
Baosteel, which has not yet concluded ore price talks with miners, is expected to raise second-quarter prices of its key products, including hot-rolled steel used in construction and heavy industry, by about 10% from the first quarter.
Shares in Chinese steel mills rose sharply after their Japanese and South Korean counterparts agreed early this week to a steep rise of 65% and 71%, depending on grade, in iron ore prices with Brazilian miner Vale.
Chinese firms are expected to complete a similar deal.
