On May 19, a source from a large steel enterprise told Sina Finance, "We have not yet received the third quarter price offer of iron ore from three major mining enterprises, and negotiations involving demand and supply are going to happen next month, plus, steel mills won't agree further price hikes."

Price offer from CVRD still up in the air

Market sources said the three major mining companies, Rio Tinto, CVRD (Companhia Vale do Rio Doce) and BHP Billiton have been looking to raise the price offer to US$160 per ton in a new round of price negotiation at the end of this month. The offer is based on average stock prices from March to May. Price of imported iron ore has dropped from last month's US$190 per ton down to the current US$165 per ton, a 13-percent decline.

The source also said iron ore's price for the second quarter, agreed to by the mill and mining companies, remained temporary. CVRD currently uses Platts index pricing system, and the price is determined in accordance with the first three months of four, which means the price of third quarter is set corresponding to the average price of March, April and May.

"Our conversation with CVRD has not covered the subject of third quarter price yet; the situation also applies to the other two mining companies. Negotiation on price should be expected during June. There is little possibility Chinese steel enterprises could absorb the speculated US$160 per ton price, and enormous deficits are inevitable if the per ton cost of steel rises as high as 2,000 yuan, while finished-steel sheets sell at 4,000 yuan per ton," the source said.

A source from Wuhan Iron and Steel Group has also indicated to Sina Finance that they haven't yet received any information on a price offer for third quarter from CVRD.

"The fact the price for iron ore stock is falling below US$160 per ton or even lower is well anticipated. Domestic steel prices fell below 4,000 yuan per ton this week, with a decline scaled from 10 to 20 percent – and why on earth is the price of iron ore still solid?" the source said.

Private mills cut production

Analysts said that if the three major mining companies indeed raise their offer prices to US$160 per ton, mills will be left with no other options but to stop purchasing stock or to cut production. Last week, BHP Billiton CEO Marius Kloppers said if the slowdown of China's industrial growth is putting pressure on commodity prices, iron ore price should be stabilized around US$120-130 per ton, which is the marginal cost of supply and that price range has considerably strong support.

Kloppers also asserted that due to short-term demand exceeding supply, iron ore prices may fluctuate sharply. He added that the market shouldn't underestimate the capacity of Chinese enterprises to improve domestic iron ore production in response to rising prices.

However, a source felt Kloppers overestimated the absorbing power of Chinese steel mills and the market.

A source from a private steel mill in Tangshan, Hebei, says the situation is tough to handle due to fund shortage and the rising cost, which is giving all players a hard time, although there is no news about cutting production. But increasing deficits from private mills inevitably will lead to production cuts. Purchases of iron ore has been put on hold by most mills during the current state of play.

An executive of Ma'anshan Iron & Steel Group said that, if falling prices of finished products persist for the third quarter, the trend will continue into the fourth quarter. With prices sharply fluctuating, what steel mills must do is to control purchases and attempt to maintain a healthy, sustainable relationship with the mining companies.