Identifier
Created
Classification
Origin
09PERTH24
2009-04-08 09:03:00
CONFIDENTIAL
Consulate Perth
Cable title:  

WA PINS IRON ORE HOPES ON CHINA

Tags:  EMIN EINV ECON PREL CH AS 
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RR RUEHDT RUEHPB
DE RUEHPT #0024/01 0980903
ZNY CCCCC ZZH
R 080903Z APR 09
FM AMCONSUL PERTH
TO RUEHC/SECSTATE SECSTATE WASHDC
INFO RUEHBY/AMEMBASSY CANBERRA 0403
RUEHDN/AMCONSUL SYDNEY 0297
RUEHBN/AMCONSUL MELBOURNE 0293
RUEHPT/AMCONSUL PERTH 0427
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHGH/AMCONSUL SHANGHAI 0006
RUEHGZ/AMCONSUL GUANGZHOU 0004
RUEHHK/AMCONSUL HONG KONG 0004
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 02 PERTH 000024 

SIPDIS

STATE FOR EAP/ANP, EAP/CM, AND EEP
USDOC FOR 3132/USFCS/OIO/EAP/JRULAND AND 4530/MAC/EAP/OPB/GPAINE
STATE PASS DOE FOR JEFF SKEER

E.O. 12958: DECL: 4/8/2019
TAGS: EMIN EINV ECON PREL CH AS
SUBJECT: WA PINS IRON ORE HOPES ON CHINA

REF: (A) CANBERRA 327, (B) MELBOURNE 42, (C) CANBERRA 295, (D) CANBERRA 330, (E) PERTH 19

PERTH 00000024 001.2 OF 002


CLASSIFIED BY: Kenneth Chern, Consul General, EXEC, State.
REASON: 1.4 (b),(d)



C O N F I D E N T I A L SECTION 01 OF 02 PERTH 000024

SIPDIS

STATE FOR EAP/ANP, EAP/CM, AND EEP
USDOC FOR 3132/USFCS/OIO/EAP/JRULAND AND 4530/MAC/EAP/OPB/GPAINE
STATE PASS DOE FOR JEFF SKEER

E.O. 12958: DECL: 4/8/2019
TAGS: EMIN EINV ECON PREL CH AS
SUBJECT: WA PINS IRON ORE HOPES ON CHINA

REF: (A) CANBERRA 327, (B) MELBOURNE 42, (C) CANBERRA 295, (D) CANBERRA 330, (E) PERTH 19

PERTH 00000024 001.2 OF 002


CLASSIFIED BY: Kenneth Chern, Consul General, EXEC, State.
REASON: 1.4 (b),(d)




1. (SBU) Summary: Iron ore miners in Western Australia (WA) are
expecting to take a big hit on prices in this year's annual
contract negotiations, but they remain optimistic about economic
recovery in the state's key export market, China. Miners'
representatives told the Consul General they expect the price of
iron ore to drop up to 40 percent this year, notably less
sharply than some market forecasts of 60 percent, as a result of
slowing demand from the Chinese steel mills and an oversupply of
iron ore. WA's iron ore producers - who account for almost all
iron ore exported from Australia, half of which goes to China
alone - concede they have a large stake in China's economic
recovery. Spotlighting Chinese investments amidst the
controversy over Canberra's China policy (refs A, B),Prime
Minister Kevin Rudd reaffirmed the importance of the China
market to the Australian economy, noting in a media interview
from London March 30 that "Australia depends on China for jobs .
. . . I'm on the hunt for jobs." End Summary.

IRON ORE PLAYERS FORECAST STEEP PRICE FALL . . .
-------------- --------------
--------------


2. (C) Iron ore and other mining representatives told the
Consul General in a series of private meetings that they expect
iron ore prices to drop from 30 - 40 percent in the annual price
negotiations for 2009. Stakeholders are awaiting the outcome of
annual contract negotiations between global producers BHP
Billiton, Rio Tinto, and Vale, on the one hand, and Chinese
steel mills, on the other. Sandra Liu, China Marketing Manager
for Fortescue Metals Group (FMG),Australia's third-largest iron
ore producer, predicted "at least" a 30 percent cut this year,
while "Jack" Cui Xiaofei, WA Manager for China's state-owned

Sinosteel, forecast a 40 percent drop. Notably, major brokerage
firms Merrill Lynch, Goldman Sachs JBWere, Deutsche Bank, and
Macquarie all lowered their forecasts March 31 to a similar 30 -
40 percent decrease, according to media reports. Although all
of these predictions point to a much steeper drop than WA
sources had expected as recently as mid-February, the
predictions are for prices above market expectations of a
possible 50 - 60 percent decrease (ref C).


3. (C) Sinosteel's Cui predicted that the cuts would be even
sharper if Chinese negotiators improved their skills. Even the
largest Chinese companies were "like little brothers" compared
to global players like Brazil's Vale or Anglo-Australians BHP
Billiton and Rio Tinto, he contended. Both Cui and Liu
intimated that the mandate for the big four Chinese state-owned
steel companies to increase their size and international
exposure, and for the smaller steel mills to merge into larger
entities, is likely to alter the nature of iron ore price
negotiations.


4. (U) Representatives of Australia's two largest iron ore
producers, BHP Billiton and Rio Tinto, have not commented
publicly on the details of likely iron ore prices, but Rio Tinto
Iron Ore CEO Sam Walsh confirmed to an iron and steel
forecasting audience March 24 in Perth that the company expects
softening demand for iron ore to translate into lower contract
prices in 2009. Unconfirmed media reports April 1 stated that
both Rio Tinto and BHP Billiton have agreed to a temporary 40
percent iron ore price cut until the formal benchmark, or
contract, deal is finalized.


5. (C) Rio Tinto's Walsh also told the iron and steel conference
that the contract negotiations will remain an important part of
the iron ore pricing system, downplaying Rio Tinto's attempt
over the past several boom years to replace the contract system
with one linked to spot-market prices. Mining contacts told the
CG that Rio Tinto's perceived heavy-handed negotiating tactics
during the boom period have left long-standing sensitivities
among Chinese iron ore stakeholders. One close Consulate
contact said Chinese officials continue to express resentment
about Japanese buyers getting better access to the global iron
ore producers, and actively demand equal exposure to what the
Japanese enjoy in the WA political and economic arenas.

PERTH 00000024 002.2 OF 002



. . . BUT BELIEVE CHINA OUTLOOK GOOD
-------------- --------------


6. (C) Despite the uncertain economic news about their main
customer, China, WA mining stakeholders remain relatively
optimistic that China will weather the global slowdown and
maintain economic growth this year. Western Australia exported
a total of 303 million tons of iron ore in 2008, valued at
A$31.3 billion (U.S.$21 billion),and over half went to China.
FMG's Liu told us that her company believes that there are
already signs the Chinese iron ore market is picking up. She
noted that iron ore stockpiles at Chinese ports are, in FMG's
estimation, lower now (80 million tons) than at this time last
year (100 million tons) -- not higher than last year, as is
reported in the media.


7. (C) Liu conceded that FMG's exposure to China's economic
fortunes is great because "100 percent of FMG's customers" are
Chinese. Liu observed, however, that the business style of
entrepreneurial founder and main shareholder Andrew "Twiggy"
Forrest was not "always bottom-dollar oriented". She compared
him to "a captain of a ship" who is passionate about selling
"Australian and Western Australian" iron ore to China.
Forrest's passion came one step closer to realization March 31
when the Australian Foreign Investment Review Board approved the
application of Chinese company Hunan Valin Iron and Steel to
take a 17.5 percent stake in the cash-troubled company (refs D,
E).


8. (C) Sinosteel's Cui was also cautiously upbeat about the iron
ore sector. He said that while cash is tight (Sinosteel paid
A$1.3 billion, or U.S.$910 million, last year in a high-priced
and ultimately ill-timed hostile takeover of Midwest
Corporation),Sinosteel's Australian operations are still
"O.K.," and the firm is seeking new investment opportunities.
He acknowledged that the parent company Sinosteel is "having
some problems" because it is contractually obligated to continue
to take ore despite slowing demand.


9. (C) Most mining and business groups believe it is not a
question of if, but when, the Chinese economy rebounds and, with
it, demand for WA and Australian minerals. Chamber of Minerals
and Energy (CME) policy spokesperson Paul Frewer told us that
CME believes the fundamentals for future Chinese growth are
still there and that, in the meantime, CME sees a good sign in
BHP Billiton's continued major expansion plans for Rapid Growth
Projects Four and Five in its Pilbara mining operations. Both
FMG's Liu and a senior Chamber of Commerce and Industry
representative commented that the focus on domestic
infrastructure projects in China will help revive demand for
steel and its major input, iron ore. Contacts all believe that
the authorities in China have the ability to "make things
happen."

WISHFUL THINKING FOR WA IRON ORE?
-------------- --------------


10. (C) Comment: It is not surprising that WA iron ore
producers, who have been among the main beneficiaries of the
five-year mining boom that witnessed rapidly growing trade and
economic ties between Western Australia and China, are talking
up China's prospects. While Japan remains an important trading
partner, China is the state's largest trading partner, has
long-term growth potential, and maintains reserves of cash for
investments. Even though businesses acknowledge that the worst
of the global downturn has yet to hit WA (because of the large
investments still going through the pipeline),there appears to
be a determination among experienced mining hands to see the
glass as half full rather than half empty. They may be
underestimating the strength and depth of the current bust, but
the way they see it, they have survived the boom and bust cycle
in WA before, and will do so again. End Comment.
CHERN