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China mills seek early end to high-priced iron ore contract

China mills seek early end to high-priced iron ore contract

Shanghai: The major iron ore producers could lose a significant chunk of their 2008-09 sales revenues if the China Iron & Steel Association (CISA) is successful in efforts to shift the start of the 2009 benchmark contract period to 1 January from 1 April, writes Steel Business Briefing (SBB).

The commodity newswire has learnt from sources in China that CISA has summoned Vale, BHP Billiton and Rio Tinto to Beijing and told them it wants to terminate the 2008 contract period three months ahead of time. The buyers are paying Vale 65-71% more than last year, and the Australian miners 85% more than last year for their iron ore.

A source close to CISA would not explicitly confirm or deny that the association wanted to bring forward the 2009 start date but said "they [the miners] broke the contract first."

"Chinese mills simply can't afford to take shipments in the first quarter of 2009 under the benchmark price of 2008," he told SBB. He said there had been "some progress in the negotiations."

A Melbourne-based analyst told SBB that if the 2009 contract price falls by up to 25%, as many anticipate, "it would take a fair slice off their earnings." "It would result in a very material volume and revenue loss for the big iron ore producers," he said.

A Shanghai-based analyst believed that CISA was "taking its chance" while the market favoured China. "Who knows what might happen in Q1 of 2009? The price might come right back," he told SBB.

Both BHP Billiton and Rio declined to comment on the negotiations.  [05/12/08]