Iron ore producer Vale SA has decided to lower the price of fourth-quarter iron ore orders from Chinese steel mills due to the falling spot price, according to an insider close to the iron ore industry on Monday. Analysts said such a decision could press the other two iron ore producers to follow suit.
The iron ore spot price slipped to $166 a ton on Monday, while the order price has remained at $175 for the fourth quarter. The price gap pushed domestic steelmakers to require a correction on the order, and some of them put off purchasing iron ore.
To cope with the defaults, Vale decided to cut the iron ore price by at least $10 a ton in a verbal agreement with domestic steelmakers after the National Day holiday, said an insider who works closely with iron ore trading.
"Last week, Vale informed the first group of Chinese steelmakers about the price cut, and this week, a second group of Chinese steel mills will be informed," said the insider. He declined to reveal the names of the steel companies that were informed.
Calls to major Chinese steel companies all went unanswered.
Vale's communications personnel in China said they cannot comment on this issue.
Since the second half of September, spot iron ore prices fell consistently, and since last week, the price for a ton fell between $2 and $3 daily.
"The drop is a result of both the high inventory in Chinese ports and the dim domestic steel market," said Zhang Lin, an analyst from the Beijing Lange Steel Information Research Center.
"Today, spot iron ore is priced at $166 a ton, which is the lowest this year, even below middle March's $170," Zhang said on Monday.
"Many Chinese steel mills have run into operating difficulties, and, obviously, they are unwilling to buy iron ore at such a high contract price," Zhang said.
"If it is true that Vale decided to lower its iron ore price for Chinese steel companies, the other two iron ore giants, BHP Billiton and Rio Tinto, will have to give in as well," said Zeng Jiesheng, an analyst with Mysteel.com, a steel industry information provider.
According to Zeng, in the past three weeks, the Chinese steel price dropped about 8 percent. "Since September, the steel price has been weak owing to both the domestic and international economic environment," said him.
The lingering European debt crisis and the weak demand in the downstream sector, such as automobile, home appliances and construction materials, led to the sales pressure for steel products, Zeng said.
"Although many steel companies' profit is eaten by the high iron ore price and other raw materials, few decided to cut output," Zeng added.
In the six weeks from Au 26 to Oct 14, steel inventories in China's 29 major cities rose 1.1 million tons to 15.52 million tons, according to Lange Steel Information Research Center.