Contract iron ore prices to fall, Walsh

Softening demand for the key steel ingredient will translate to lower contract prices this year but annual contract negotiations will continue to play an important role, Rio Tinto Iron Ore chief executive Sam Walsh told the Annual Global Iron Ore and Steel Forecast conference in Perth yesterday.

Walsh also said Chinalco’s planned $28billion investment in Rio would have no impact on its iron ore price negotiations with Chinese steel mills.

There is widespread industry concern that the state-owned Chinalco will have influence over the annual price negotiations and drive the prices lower.

“Rio Tinto negotiated the highest ever price increase with Baosteel last year at the very same time when our shareholder registry demonstrated the largest single shareholder in Rio Tinto was Chinalco,” Walsh said.

Annual iron ore contract price negotiations for the year starting April 1 are already underway and analysts are predicting a drop in prices due to the global financial crisis.

Citi analyst Alan Heap told the conference there was a ‘whopping oversupply’ of iron ore and predicted demand would fall by 7.5% this year, while supply would rise by 7%.

In the last fortnight several analysts have revised their iron ore price forecasts downward, with most of the market now expecting a 30% to 40% fall in the benchmark price this year.

In January and early February iron ore prices rallied closer to last year’s record benchmark price for fine grained ore of about $US90 a tonne, excluding shipping.

But the spot price of iron ore has since fallen below $US60 a tonne, which includes shipping costs of about $US7 a tonne. That means the spot price is effectively 40% below the benchmark price.

“Although we did see an uptick a month ago, I think it takes quite a leap of faith based on this to ‘call’ the bottom of the downturn,” Walsh said.

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