Last week, Rio Tinto Plc (RTP) suspended talks with Chinese steelmakers over price cuts on iron ore. Rio, BHP Billiton (BHP) and Brazil’s Vale S.A. (VALE) were participating in the negotiation.

Tensions between China and Rio grew when the world’s second-largest miner spiked a deal with Aluminum Corp. of China (ACH). According to the contract, Chinalco would have invested $19.5 billion in the debt laden Rio. However, the Rio decided to form a joint-venture with rival BHP instead. Again, tension over the talks rose when four Rio employees were detained on July 5 and later charged with bribery and commercial espionage.

China, the world’s largest importer of iron ore, is now looking for just a 35% price cut, versus the 40% it wanted back in June, according to a Bloomberg report. That is slightly over the 33% cut that Rio has been proposing all along.

Surprisingly, China is holding out against Rio for a marginal concession despite being the only country to actually increase steel production. Thus, it would probably need iron ore more than any other nation.

The World Steel Association’s July data shows that China’s production increased 12% year over year, double the increase in June. In contrast, Japan and the U.S. saw declines in production.

Despite short-term uncertainties, we expect Chinese demand to continue growing rapidly in the medium term due to sustained economic growth and urbanization in the country. However, the outlook for 2009 is uncertain as we have no reliable information on price adjustment for iron ore for the year.

Zacks Investment Research
View original at: Zacks.com News Feed

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