December 03, 2008

Iron ore price negotiations – China denying credit for spot iron ore buying

It is reported that Chinese steel mills are worried about their iron ore inventories in coming weeks, as most of the steel mills and traders have been denied bank credit for issuing letter of credit for iron ore procurement.

The recent measure of denying credit to iron ore importers is a desperate effort to bring down the spot iron ore price, so as to enable Chinese to finalize annual contracts with Australian miners before April 1st 2008.

Although most of Chinese buyers are at a risk of insufficient iron ore inventories, they are facing unprecedented delays in issuing letter of credit for last few days.

However the reliable sources in China said that this measure will not have much impact on iron ore spot prices. Strengthening Chinese currency is also going to help Chinese mills lowering their import cost of iron ore. RMB is reported quoting at 7.04 against US Dollar, compared to a exchange rate of 7.45 in the month of January.

The battle for higher iron ore spot prices continues with Rio Tinto saying its well placed to achieve a premium price from Chinese steelmakers. Rio continues to argue its iron ore, from the Pilbara Region in Western Australia, is much cheaper to import than iron ore from other regions, such as Brazil. The company has also decided to reduce the volume of iron ore delivered to term customers, in order to maximize sales on the lucrative spot market.