By Ruthie Ackerman, Forbes
January 30, 2008
In the midst of tense iron ore price negotiations between China and the iron ore miners came a ray of hope on Wednesday.
To keep up with the soaring demand
Baoshan Iron & Steel, better known as Baosteel, signed an agreement with
BHP Billiton (nyse:
BBL - news - people ) to supply China’s leading steelmaker with an additional 94 million tons of iron ore, although how much China will pay for the ore is still up in the air.
Iron ore is one of the main ingredients in steel production.
Under the new agreement BHP will supply Baosteel with 10 million tons of iron ore each year for ten years at a price to be mutually agreed upon each year, BHP said Wednesday. BHP is the world's biggest mining company.
The two companies have not yet agreed on a price for the coming year, a spokeswoman for BHP Billiton in China told the Associated Press.
BHP and other miners are in ongoing talks with steel mills over iron ore prices and tonnages for shipments between April 1, 2008 and March 31, 2009.
Baosteel recently walked away from the annual negotiations with Australia's BHP and
Rio Tinto (nyse:
RTP - news - people ) and Brazil's Vale, formerly known as
Companhia Vale do Rio Doce (nyse:
RIO - news - people ), leaving the benchmark price for iron ore in 2008 unsettled. (See “ Baosteel Walks Away from Talks With Iron Ore Miners”)
Before the talks, Chinese steel mills were prepared to accept a 30% rise in the benchmark. But the the Australian Financial Review reported that the miners wanted a 50% price hike. Some analysts say the price increase for iron ore may be as much as 60% to 70%.
The agreement between BHP and Baosteel extends an existing 6 million-ton a year sales agreement due to expire in March.
Cantor Fitzgerald analyst Natasha Boyden said the agreement between the two companies is definitely a positive and shows that China and the miners are still talking.
Boyden said the agreement is a good sign for the capesize shipping rates because now a great deal more iron ore will be shipped.
The Baltic Cape Index, which measures capesize shipping rates in 40 routes across the world and is managed by the Baltic Exchange in London, soared 1,108 points to close at 8,310. Cape size vessels, which are the largest ships, stand to benefit the most from BHP’s agreement with Baosteel.
The first shipment under the new contract, which was also signed by BHP’s joint venture partners Itochu Minerals & Energy of Australia, Mitsui-Itochu Iron and Mitsui Iron Ore, is scheduled to be shipped for April 2008. BHP’s share is 85%.
Tom Shutte, BHP Billiton’s president of marketing said the agreement shows BHP’s long-term commitment to Baosteel by guaranteeing a stable and predictable supply of iron ore.
“This is a significant quantity of iron ore and highlights our interest in keeping pace with high demand in China during a time when supply is tight,” said Shutte.
Shutte said BHP is able to supply the iron ore by investing in the expansion of mine, rail, and port operations in Western Australia.
Dai Zhihao, Baosteel’s vice president, said the new supply of iron ore “highlights our optimism about the long-term prospects for the steel industry in China.”
Charles Rupinski, senior vice president at Maxim Group, said the agreement between BHP and Baosteel shows there’s a real urgency from the Chinese steel producers to have a steady supply of iron ore that they know they can count on going forward, which is good for the dry bulk shippers that ship coal, steel, grains and other commodities.
Dry bulk shippers rode the wave as their shares pushed higher.
DryShips (nasdaq:
DRYS - news - people ) shares soared 8.1%, or $5.03, to $67.47 in afternoon trading, while
Diana Shipping (nyse:
DSX - news - people ) rose 3.6%, or 96 cents, to $27.62.
Quintana Maritime Limited (nasdaq:
QMAR - news - people ) jumped 4.8%, or $1.05, to $23.07.
Excel Maritime Carriers (nyse:
EXM - news - people ) gained 4.8%, or $1.53, to $33.31.
Paragon Shipping (nasdaq:
PRGN - news - people ) increased 2.1%, or 36 cents, to $17.80.
Rupinski said investors are looking ahead to the end of February, early March when there’s expected to be a lot more movement of dry bulk cargoes as the Chinese seek to replenish their steel and coal inventories which are at very low levels.
BHP said the agreement is a result of discussions between the two companies over the past two years.
Wednesday’s deal is not related to BHP’s unsolicited offer for rival Rio Tinto, BHP said, which had concerned steel makers in China which thought the combination of the two largest miners would cause iron ore prices to rise. (See “ BHP Struts in Front of Rio”)
The Associated Press contributed to this article.
Source: Forbes
Shippers Soar on BHP/Baosteel Deal
