On August 17, 2009, Perth-based Australian miner Fortescue Metals Group Ltd (Fortescue) announced that it achieved a landmark agreement with Baosteel Group Corporation (Baosteel) and China Iron and Steel Association (CISA) for an agreed China price for all Fortescue iron ore sold to Chinese mills for the period July 1 to December 31, 2009.
According to the official announcement released by Fortescue, the agreed price is US$0.94/dry metric tonne unit (dmtu) for Fortescue's Rocket Fines (on an FOB basis) and is around three percent under the price agreed by other Australian producers with non Chinese Steel mills. This price equates to approximately US$55.50/mt for Fortescue grade iron ore. Fortescue has also agreed a lump price of US$1.00/dmtu for high grade lump which is equivalent to approximately US$61/mt FOB. The prices represented a 35.02 percent drop for ore fines compared to last year and a 50.42 percent drop for ore lumps, said CISA secretary general Shan Shanghua.
Therefore, China has secured a price cut for fine iron ore from Australian miner Fortescue Metals, better than the 33 percent that other major Asian mills have signed with Australia's BHP Billiton and Rio Tinto, and Brazil's Vale, but lower than the 40 percent cut CISA previously sought.
The agreement, signed by Baosteel and CISA, commits Chinese steel mills to acquire approximately 20 million wet metric tonnes from Fortescue for the period between July 1 and December 31, 2009. A condition subsequent to this agreement is the completion of finance by September 30, 2009, by Chinese financiers on terms acceptable to Fortescue. This is estimated by Fortescue to be an amount of US$5.5 billion to US$6 billion.
The company may need between US$3 billion and US$4 billion to proceed with plans to almost double output, Chinese steelmaker Hunan Valin Iron and Steel Group, Fortescue's second largest shareholder, said in May.
Under the agreement, CISA has also guaranteed that a priority will be given to Fortescue to negotiate iron ore prices for 2010 if the annual pricing negotiation is conducted.
Meanwhile, CISA said in a statement released today that it also appreciated the concerns from home and abroad to the iron ore negotiation and added that the Chinese mills would carefully comply with the agreement and make preparations for it according to the plan for restructuring and invigorating the Chinese steel industry.
Industrial insiders think that this result will curb the soaring prices of imported ore, which is also beneficial to guide Chinese steel prices back to the reasonable levels; and China's steel market will enter the declining phase, added CISA.
Fortescue Chief Executive Officer Mr Andrew Forrest said, "The agreement breaks the market impasse which has enveloped the Chinese iron ore industry in uncertainty and added risk for the past 12 months."
"This groundbreaking agreement cements the strength of the bilateral relationship between Australia and China in which mutual issues can be resolved and future opportunities identified. It also creates a realistic and agreed iron ore price that delivers value for all parties and provides strong support for Fortescue's continued growth," Mr Forrest stated.
"The ongoing market speculation has promoted unprecedented iron ore and steel price volatility, which in turn has created extreme production uncertainties for Chinese steel mills and for suppliers setting individual contracts with those mills," added Mr Forrest.
Talks between Chinese steelmakers and producers have lasted longer than any time in the past 40 years. Last month, China accused suppliers of encouraging speculative actions in pricing and imports after volumes surged to a record.
China last week formally arrested four Rio Tinto executives, including Australian Stern Hu, head of the company's iron ore business in China. The executives have been accused of obtaining trade secrets and commercial bribery.