Rio Tinto (RTP, RIO.L, RIO.AX), the Anglo-Australian mining group, agreed Tuesday to a 33%-44% cut in iron ore prices with Japan's Nippon Steel Corp. (NISTY.PK, NISTF.PK) for the contract year commencing April 1, 2009, which is reportedly the first in seven years. The price cuts reflect the worldwide slump in demand amid the economic recession.
The company, combining the LSE and NYSE-listed Rio Tinto plc and ASX-listed Rio Tinto Ltd., noted that its subsidiary Hamersley Iron in Western Australia reached the agreement with the Japanese steelmaker on the price for the Hamersley iron ore deliveries for the new contract year.
Through Hamersley Iron, Rio Tinto's Iron Ore group owns six mines. The company also operates the 60% owned Channar mine, a joint venture with an Australian subsidiary of the China Iron & Steel Industry & Trade Group Corp., and the 54% Eastern Range mine, a joint venture with China's Baosteel Group Corp.
The U.K.-headquartered Rio Tinto noted that, under the agreement, the new prices for Hamersley products will be US$0.97 per dry metric tonne unit for Pilbara Blend Fines, versus last year's price of US$1.447. The new price for Yandicoogina Fines stands at US$0.97 per dry metric tonne unit, versus the 2008 price of US$1.447 and that for the Pilbara Blend Lump was agreed at US$1.12 per dry metric tonne unit, compared to 2008 price of US$2.017.
Rio Tinto's Iron Ore Chief Executive Sam Walsh described the settlement as a "realistic outcome for both parties - one that reflects the global market for iron ore and the current challenging market conditions facing our customers."
Rio Tinto's major products are aluminum, copper, diamonds, energy in the form of coal and uranium, gold, industrial minerals such as borax, titanium dioxide, salt, talc, and iron ore.
Walsh, in a media presentation on May 19, had stated that iron ore is a significant contributor to the company, and accounts for 58% of its 2008 underlying earnings at $6.017 million with gross sales revenue at $16.53 billion.
He further reported that Pilbara iron ore production for the first quarter of 2009 was 36 metric tone, which is down 15% year-over-year, citing the adverse impact from severe weather conditions and related shut-down in production.
Walsh, also forecast at that time that 2009 global iron ore production would be approximated 200 metric tonne, banking on the completion of the recovery work and the capacity enhancement being continued at these facilities.
In mid-Arpil, Rio Tinto had reported a 15% decline in global iron ore production in the first quarter, hurt by reduced market demand and severe weather conditions. The company had also reported a decline in production from Coal & Allied, while Energy Resources of Australia Ltd recorded 73% growth in material mined in the quarter. Further, Rio Tinto had backed its fiscal 2009 iron ore production forecast to remain around 200 million tonnes, on a 100% basis, with an expected recovery in Chinese steel demand in the second half of 2009.
The Rio Tinto-Nippon Steel pricing agreement assumes much importance in the current recessionary scenario. According to the media reports, the current deal is the first between a large mining company and a steel mill, and is expected to set the industry benchmark to be adopted worldwide for many more similar deals.
According to one such report, the Rio-Nippon Steel agreement marks a departure from prior years, where Brazil's Cia Vale do Rio Doce (VALE) and Baosteel were the traditional leaders in such negotiations.
The reports further noted that the current deal also comes at a time when Chinese steel mills, by far the largest buyers of iron ore, continue to demand much lower prices from producers as demand slumped. A Reuters report cited China Iron and Steel Association as telling its members not to accept rates cuts less than 45% from Australian iron ore miners, including Rio Tinto and BHP Billiton (BHP, BBL, BLT.L).
The company did not provide any new information on Rio Tinto's deal with China's state-owned Chinalco. On May 19, the Australian newspaper, citing unidentified sources, had reported that Rio Tinto was looking to replace its US$7.2 billion convertible bond issue to Chinalco with a capital raising underwritten by the Chinese firm.
The report further stated that Rio Tinto is understood to have told Chinalco that talks with Rio shareholders have given rise to demand for changes to the planned US$19.5 billion of asset and bond sales, including the US $7.2 billion of convertible bonds and US$12.3 billion worth of assets.
On NYSE, RTP closed Friday's regular trading session at $173.84, up $3.63, or 2.13%, on a volume of 891,587 shares.
On the Australian exchange, Rio Tinto closed up 2.15%, while in London, in early trading, the stock was down 1.23% on day.
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