China Should Pay More on Iron Ore on Risks, Applebaum Says

NEWYORK, Mar. 30 -- Steelmakers in China, the biggest iron ore consumer, should pay a premium because of the risks of doing business there and their need to secure supply, according to Michelle Applebaum Research Inc.

"As the largest buyer, they have to a pay premium to get size tonnage," according to an e-mail report sent by Dave Uhryniak, an analyst with the U.S.-based researcher. The conviction of four Rio Tinto Group iron ore employees in China highlight the "increased risk" of doing business and should translate into a higher price, the report said.

A Shanghai judge yesterday sentenced the Rio workers to between 7 and 14 years in prison for stealing commercial secrets and accepting bribes, blaming them for the collapse of price talks last year. Vale SA, the largest iron ore producer, won a 90 percent price increase for a quarterly contract starting April 1 from Japan's Sumitomo Metal Industries Co.

"Chinese iron ore prices will settle at least as high, if not higher than other Asian players," the report said.

Sumitomo Metal agreed to pay Vale $100 to $110 a metric ton for the iron ore, spokesman Toshifumi Matsui said today. Chinese mills oppose a demand by suppliers to increase prices by 90 percent, the China Iron & Steel Association said March 16.

Chinese steelmakers last year rejected a 33 percent price cut offered by iron ore producer Rio Tinto Group as insufficient, and said they wanted to set a price separate from the rest of the world as the biggest buyer. The failure of talks led to the end of a 40-year annual pricing tradition.

Baosteel Group Corp., representing China in iron ore price talks, last week said the contract pricing system needs improvement and it's reasonable to expect "adjustments" to the way the products are priced. The breaking with tradition and a shortage of iron ore have led to tensions between producers and steelmakers, Baosteel Chairman Xu Lejiang said in a March 25 interview in Shanghai.

BHP Billiton Ltd., the world's biggest mining company, reached agreement to sell the majority of its iron ore to Asian steel mills on shorter term contracts, Melbourne-based BHP said today in a statement. BHP didn't give a price or identify its customers.