China's Iron and Steel Association (CISA) said yesterday that Brazilian iron ore giant Vale's decision to raise its prices by as much as 20 percent was "unreasonable" and threatened the international pricing mechanism.

In a strongly worded statement, CISA said the price hike by the world's biggest iron ore supplier, announced on Sept 9, would result in big losses for Chinese steel mills and further impair iron ore trade relations between China and Brazil.

Sources confirmed that Vale had sent emails to Chinese customers demanding that they pay 20 percent more for its iron ore, an exceptional break from the existing price agreement.

"According to my knowledge, Vale's price rise seeks to pass upward cost pressures to foreign end-users. After Rio Tinto and BHP Billiton increased their product prices by a large margin, Vale broke its former price contract with Asian buyers and asked for a larger profit," Zun Jiesheng, a manager with steel information provider Mysteel, told China Daily.

In June and July, on behalf of the Chinese steel industry, Baosteel, the nation's leading steel producer agreed a price hike of 96.5 percent for iron ore supplies this year with Rio Tinto and BHP Billiton respectively, which eclipsed the earlier deal between Vale and Baosteel on a 71 percent price raise.

"But Vale may not be as adamant as it seems to be, and chances are that they are flying a kite," Zun added.

The annual iron ore price negotiations for 2009 will take place in a few months, setting iron ore prices for the following year, effective from May 1, said Zun.

Vale's price rise at this time is intended to gain the upper hand during the annual price negotiations.

According to information from Vale, reference prices for Asian clients are currently 11 to 11.5 percent lower than those for European customers, depending on the type of iron ore.

Vale is the world's largest producer and exporter of iron ores, with a market capitalization over US$150 billion in total, among which, 60 percent is iron ore. In comparison, Rio Tinto and BHP Billiton have more diverse product lines, including gasoline and coal. Vale's heavy reliance on iron ore contributed to its price rise initiative.

Vale said that this price negotiation is not concluded. If the new price is implemented, it will mean an estimated revenue increase smaller than 3 percent of Vale's total revenue of $35.5 billion for the 12-month period that ended on June 30.

The Sept 9 announcement is targeted at all major iron ore users in Asian countries, including Japan and South Korea. "There are signs that Japanese and South Korean steel mills are more willing to accept this new price, as up to 90 percent of their iron ore will be bought based on the cheaper long-term agreement, while 20 percent of China's will be purchased in this way," said Zun.

(China Daily September 19, 2008)