Vale Negotiating Price Reductions in Iron-Ore Contracts

Vale SA, the world’s largest iron-ore producer, said it’s in talks with customers including ArcelorMittal and China Steel Corp. to cut contract prices after clients pressured the company to revise its pricing system.

Almost 80 percent of the company’s iron-ore sales are based on the current quarter’s price, compared with a previous system that used the period ending a month before the onset of a new quarter, Jose Carlos Martins, head of iron-ore and strategy for Vale, said today in London.

Iron-ore prices for immediate delivery to China, the largest user, fell about 18 percent during 2011 and reached their lowest level in almost two years on Oct. 28, prompting steelmakers to seek discounts. Chinese and European customers are moving toward the new contract system while Japan and Korean customers want to keep the previous one, Martins said.

“With the recent drop in prices we got a lot of pressure from customers to change” the pricing system, Martins told reporters today during a press conference after Vale hosted a meeting with investors. “We are more flexible to accept the price reality from the market.”

The price of ore with 62 percent iron content delivered to the Chinese port of Tianjin fell 0.1 percent to $139.40 a metric ton today, according to The Steel Index Ltd, averaging $142.33 so far in the fourth quarter. Vale sold its iron ore at an average of $151.30 per metric ton during the third quarter, the company said Oct. 26.

ArcelorMittal Talks

Vale is negotiating with ArcelorMittal, the world’s largest steelmaker, to revise its contracts to current quarter pricing, Martins said. The company reached a similar agreement with China Steel, Taiwan’s largest steelmaker, he said. Companies moving to the new system won’t be allowed to return to the previous one, Martins added.

“For China Steel it is not a discount, it is only moving the price system from one system to the other,” he said.

Vale is setting up “provisional” prices with customers who adopt the new pricing system, Martins said. Differences with the quarterly average will be settled at the end of the period, he said. Prices are currently about 20 percent below the previous system, he said.

Quarterly Contracts

Vale, along with BHP Billiton Ltd. and Rio Tinto Group, in 2010 abandoned a 40-year custom of setting prices annually in favor of quarterly contracts. The new accords were based on a three-month average of price indexes for the period ending a month before the start of the new quarter.

Weakness in the market is “accelerating the move to shorter pricing methods and closer to spot,” Rio Tinto Chief Executive Officer Tom Albanese told analysts in Sydney Oct. 24.

Vale dropped 3.6 percent to 39.06 reais in Sao Paulo at 6:08 p.m., the biggest fall in almost two weeks. The stock has declined about 17 percent during 2011, more than the 15 percent decrease in the Brazilian benchmark Bovespa Index.

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