WA PINS IRON ORE HOPES ON CHINA

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