Making Steel Just Got Cheaper (RTP, CLF, MT)

UK-based miner Rio Tinto plc (NYSE:RTP) has announced a pricing agreement with Japan’s Nippon Steel for iron ore for the contract year beginning April 1, 2009. The new prices are about 33% below last year’s contract. A Rio executive said, “We believe this settlement is a realistic outcome for both parties – one that reflects the global market for iron ore and the current challenging market conditions facing our customers.”

The pressure on the steel industry has been fierce. Construction and auto making have stalled, causing demand to drop, and turning off demand for iron ore as well. Rio’s latest operations report noted that iron ore production was down 15% in the first quarter of 2009. US iron ore miner Cliffs Natural Resources (NYSE:CLF) saw revenue fall 6% in the first quarter and has cut production at its US mines going forward.

ArcelorMittal (NYSE:MT), the world’s largest steelmaker, cut production by 50% in the first half of 2009, but expects an annual drop of 15%-20% in demand for steel in 2009. The company expects demand from China to pick up, as well as an improved market in the US to brighten its outlook.

Expectations are that Chinese steelmakers will drive a harder bargain with the iron ore producers, lopping another 8%-15% off the deal between Rio and Nippon Steel. That will really hurt.

Rio’s shares are off more than 1% in the pre-market, at $171.06. The company’s 52-week range is $59.20-$515.15. Cliffs is up a fraction to $23.24, near the bottom of its 52-week range of $11.80-$121.95. ArcelorMittal is down more than 1.5%, to $28.50. It’s 52-week range is $15.44-$104.77.

Paul Ausick
May 26, 2009