Vale Withdraws Demand for Iron Ore Price Increase

By Theresa Tang

Nov. 3 (Bloomberg) -- Cia. Vale do Rio Doce, the world's largest iron ore supplier, withdrew demands for a 12 percent price increase from Chinese steelmakers as economic growth slows, customer Baosteel Group Corp. said.

Vale said asking for higher prices for the steelmaking raw material ``was bad timing when the global steel industry is in the throes of a downturn,'' Xu Lejiang, chairman of China's largest steelmaker, said in an interview at Kaohsiung in southern Taiwan. ``They have pulled back the proposal.''

The global economic slowdown since June has curbed demand for steel, damped prices and turned Chinese steel mills unprofitable in October, the China Iron & Steel Association said. Rio de Janeiro-based Vale, which began pushing for an increase as early as July, last week said it will cut output.

Vale, which raised prices by 71 percent earlier this year, was threatening to withhold shipments of iron ore to China unless steelmakers agreed to another price gain of 12 percent. Chinese steelmakers said prices should fall because demand for their products have plunged.

China's steel consumption may drop below 489 million metric tons this year, which was last year's production level, creating a ``serious imbalance in demand and supply,'' Xu said earlier at a conference.

Michael Zhu, Vale's China president, couldn't be reached for immediate comments.

High Inventories

``All steelmills are worried about digesting high inventories,'' said Luo Wei, a Shanghai-based analyst at China International Capital Corp. ``Very few steelmakers are buying iron ore right now.''

Baoshan Iron & Steel Co., the Shanghai-listed unit of Baosteel, last week said tumbling demand and prices may force it to write off inventories and incur a fourth-quarter loss.

``It's very tough for Chinese steelmills when steel prices dives but raw material costs such as iron ore and coking coal were at records,'' Baosteel's Xu said, The Chinese ``steel industry will face a possible whole industry deficit in the fourth quarter.''

The slowdown may represent an opportunity for bigger steel companies to buy rivals, he said. Baosteel's plans to reach 80 million tons of output by 2012 could be achieved by acquisitions, Xu said.

China Steel Cooperation

Baosteel is looking to ``promote intensive cooperation'' with Taiwan's China Steel Corp. in areas including mergers and acquisitions, Xu also said.

The two companies are looking at sharing acquisitions experience and technologies, China's Steel Chairman Chang Chia- juch said in an interview today in Kaohsiung. There are no mergers and acquisitions talks between the two parties, Chang said.

China's economy grew 9 percent in the third quarter, the slowest in five years.

Cash prices of iron ore imported by China tumbled 16 percent last week, the 11th straight weekly drop because of weaker demand. Mt. Gibson Iron Ltd., an Australian iron ore producer, today said it signed new sales contracts at lower prices after customers defaulted on earlier accords.

Contract iron ore prices may drop in 2009, the first year in seven, because of slowing global demand, Macquarie Group Ltd. said Oct 13. UBS AG has predicted a 15 percent decline.

To contact the reporter for this story: Theresa Tang in Hong Kong at ttang3@bloomberg.net