Vale's 'irrational' iron ore pricing demands draw Chinese steel mills ire

Chinese steel mills are vigorously opposing Vale’s plans for interim iron ore price hikes during this contract year, although the world No. 1 iron ore miner may be softening its stance.

BEIJING (Reuters) - 

China's steel association has formally complained to Brazilian miner Vale (VALE5.SA) over its demand for higher payments for iron ore, Chinese media said, even as Vale's position appears to be softening.

The open letter urged Vale to immediately stop pressing for a price hike action, which it called "irrational," adding that it "hurts the long-term interests of both parties."

"Vale's unilateral breach of contract violates international trade rules and devastates the mechanism of negotiations on iron ore prices," the newspaper said, citing an unnamed official at the China Iron and Steel Association.

Vale's move would also cause "huge, irrevocable losses for China's steel mills," while harming established iron ore trade relations between China and Brazil, the official said.

Vale has asked its Asian customers to pay about 12-13 percent more for iron ore under 2008 term contracts, to bring their FOB prices in line with those paid by European steel mills.

However, it offered its biggest customers a discount on that raise, while demanding smaller mills pay the full additional amount, an industry source said.

Chinese steel mills met at the association's headquarters last week, but failed to hash out a clear strategy for opposing Vale's hike.

But even as they met, Vale seemed to back off its original demand. Chief executive Roger Agnelli told reporters last week that the price rises it sought were for "all for next year" even though the emails received by Chinese steel mills had said higher prices were effective Sept. 1.

The attempt to raise prices months after the annual prices were negotiated is unprecedented and follows a successful effort by Australian miners BHP Billiton (BHP.AX) (BLT.L) and Rio Tinto (RIO.L) (RIO.AX) to get a larger price rise from Asian mills for 2008.

The miners' deviation from the traditional negotiating system, where all mills and miners accept the first price settled by any of them, could push mills and miners to a more flexible price-setting mechanism.

Traditionally, annual negotiations begin in late October, for the fiscal year beginning April 1. (Additional reporting by Samuel Shen in Shanghai; Editing by Ken Wills)

© Thomson Reuters 2008. All rights reserved.

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