Rio Tinto joins steel reform as local costs mount

Steel has traded up to AED3000 per tonne

Iron ore giant Rio Tinto on Friday added its name to the shortlist of mining heavyweights pushing through pricing contract reform that has seen the price of steel for local suppliers to leap in recent weeks.

The London-based company, the world’s second biggest miner, said in a statement to the Australian Stock Exchange that it has entered talks with customers to switch from annual to quarterly pricing.

It believes the system is better than ‘benchmark’ pricing that only works if it reflects market fundamentals. However, speculation on iron ore pricing – which has already led to the arrest of four Rio Tinto employees in a Chinese court for industrial espionage and bribery - saw spot prices increase far above their benchmark rates.

It follows similar moves by Anglo-Australian rival BHP Billiton and Brazilian firm Vale to negotiate business based on shorter-term contracts and capitalize on the peak in demand for iron ore – a key ingredient in steel-making along with coking coal and scrap.

Higher prices have led to the inevitable knock-on effect on steel product producers and their customers in construction.

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Mr Govia of Dubai-based Emirates Buildmat, whose subsidiary company Euro Gulf Steel Industries sources scrap both locally and internationally to produce mild steel products, said that raw material prices had been kept relatively low until recent month due to lack of local demand.

He adds that steel prices are also affected by the wider landscape of the world’s biggest producers, such as India’s 20% export duty.

“We have to accept the fact that steel prices will stay high for some time. Here it can be as much as AED3000 per tonne, where in China it is between AED690 and AED720.

He is also phlegmatic about the wider industry for steel products for construction ends. “I don’t believe in 2010 people will anticipate any growth, or at least the growth should be no more than 1-1.5%.”

The World Steel Association, which represents around 180 steel producers, has voiced its opposition to the reforms and defended the benchmark system.

On 1st April, Ian Christmas, director general, said: “The benchmark system may have imperfections but it has the merit of supporting long-term relationships between the steel industry and raw materials suppliers leading to beneficial medium-term investment decisions. The implied move to spot pricing will be volatile and benefit neither side in the medium to long term."

He added that the move will lead to an oligopoly between the three miners and urged the competition authorities to investigate the matter.