Slower demand may prompt smaller makers to default on iron ore contracts in the third quarter, Baosteel Group Corp. Chairman Xu Lejiang said today at the Bloomberg Businessweek Green Business Summit in Shanghai.

“Many steelmakers will cut production or carry out maintenance in the third quarter,” Xu said. “Steel demand from automotive and home appliance industries has become weak. Iron ore costs will be the highest in the third quarter.”

Mills face a “difficult” second half, Xu said last month as concern increases that measures to curb speculation in the property market will trim demand. Baoshan Iron & Steel Co., Baosteel’s publicly traded unit, cut prices on June 4, the first time in eight months.

“Many Chinese steelmakers are either losing money or close to losing money,” Michelle Applebaum, who runs a steel-research firm in Highland Park, Illinois, wrote in an e-mail today. “The timing on iron ore price increases in the coming months is very poor for many of China’s higher cost smaller steelmakers.”

Price decline

Benchmark steel prices in China, the biggest consumer of the metal, have fallen 10 percent from an 18-month high on April 15, according to Beijing Antaike Information Development Co. Tangshan Iron & Steel Group, part of China’s largest steelmaker, and Baotou Iron & Steel Group may shut plants for maintenance this month as prices fall, UC361.com analyst Hu Yanping said June 2.

“If they cut production they’ll be buying less ore and that would likely push ore costs lower for the fourth quarter, benefiting all producers,” Applebaum said in the e-mail.

Baosteel and China’s bigger steelmakers will respect their iron-ore contracts even as spot prices may fall below the contract levels in the third quarter, Xu said.

“We will honor the contracts, although we may question the rationality of the quarterly pricing system in the negotiations with the suppliers,” Xu said, “It’s hard to say we will see more supplies from the spot market. Steelmakers have various purchasing strategies.”

Iron Ore

Prices for 62 percent iron-content ore arriving at Chinese ports have dropped 21 percent to $147.50 a ton from $186.50 on April 21, according to The Steel Index. Iron ore and coking coal are the two key ingredients in steel. Iron ore inventories at major Chinese ports rose 2.1 percent last week as falling steel prices prompted some mills to cut production and buy less, researcher Mysteel.com said June 4.

Quarterly iron ore prices may rise in the third quarter and drop in the fourth quarter, Xu said.

Vale SA, BHP Billiton Ltd. and Rio Tinto Group this year abandoned a 40-year tradition of setting prices annually in favor of quarterly contracts, with the Brazilian mill winning a 90 percent increase for the April period.

Quarterly prices are based on the average index prices of prior three months, Vale SA said last week in Shanghai.

--Helen Yuan. Editors: Andrew Hobbs, Indranil Ghosh

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net.

Sourced from www.businessweek.com