Effect of Chinalco-Rio Tinto agreement remains uncertain
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The Simandou iron ore agreement between Aluminum Corporation of China (Chinalco) and Rio Tinto could ease the long-term iron ore shortage for China's steel industry, although prices are unlikely to fall in the near future, according to experts.
Chinalco signed a non-binding agreement Friday with Rio Tinto to set up a joint venture (JV) to develop the Simandou iron ore mine in Guinea, West Africa, with an estimated annual output of 70 million tonnes, all of which would be sold to China.
Zhang Junsheng, director of the WTO Research Institute at the University of International Business and Economics, said it was still an open question as to whether the agreement could reduce import prices in China.
"In the first place, the deal is not yet settled, as the agreement contains no legal obligations," he said.
"Even if the JV does come into being, whether the price will be favorable to China depends on whether Chinalco can have a say in determining the price," he said.
Chinalco will invest 1.35 billion U.S. dollars for 44.65 percent of the JV, and Rio Tinto will hold 50.35 percent, while the other 5 percent will go to a third financial company, according to the agreement.
"I will not feel optimistic about the agreement until I see the JV founded and cheap iron is imported into China, or Chinalco develops the mine itself," he said.
Zhang Lin, an analyst with Lange steel, an online steel information service, said the deal, even if struck, would have little influence on current costs of steel makers, though it could cut prices in the future.
"As far as I know, the JV will not go into operation before 2013, so the current iron price will not be much affected."
Since Chinese steel manufacturers imported iron ore at spot prices rather than futures prices, their present costs would not fall much, she said.
However, in operation, the project could relieve the iron ore shortage that many steel makers faced, she said.
"The annual import of 70 million tonnes of iron ore can make about 45 million tonnes of steel, which exceeds the annual output of Hebei Iron and Steel Group, China's largest, and the world's second largest steel maker in terms of annual output," she said.
Hu Kai, an analyst with Umetal, another online steel information provider, was optimistic about the joint venture.
"If the agreement is implemented, I think the iron price, followed by the steel price, will drop, as expectations of an increase in supply could influence spot prices, though it is impossible to predict how much the price would drop," he said.
The expected annual output of the mine accounted for more than a tenth of China's iron ore imports, he said. Customs data showed that last year the country imported 628 million tonnes of iron ore.
Cooperation with Rio Tinto in overseas mining was a good choice for Chinese companies, as the giant iron supplier had advanced mining technology and management that Chinese counterparts lacked, Hu said.
"But of course, nothing will happen if the non-binding agreement remains non-binding," he said.
Last year Rio Tinto rejected Chinalco's offer to buy 19.5 billion U.S. dollars worth of shares.
