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China Ready to Begin Iron Ore Talks

There's a strong likelihood the Chinese will end up with some kind of a price premium to the rest of the steel industry.

China Starts to Talk Ore.

Reports say Chinese steel company officials are getting ready to meet with representatives from the three major global miners to kick off talks on the upcoming April 2010 iron ore contract. According to press reports, the miners have asked for a 40% increase in the contract price with other Asian mills, but Chinese mills have stated thus far they are unwilling to accept an increase of more than 30%, with a target in the 20% to 30% range.

Will There Be a China Premium? Does Bullying Behavior Backfire?

We believe there is a strong likelihood that the Chinese will end up with some kind of a price premium to the rest of the steel industry. Clearly the cost of doing business with China has proven significantly higher than other regions, and in fact last July after the arrest of the four

Rio Tinto

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commercial executives, there was a flurry of press reports out of Australia pointing to a rumored request from Rio to the Chinese for some $9 billion in compensation for canceled contracts that were part of the Chinese "negotiating strategy."

Reports also surfaced that the three mining giants began to cut back spot sales to China in favor of other customers, who weren't arresting their staffers. We're surprised that we haven't heard anything about this in the market, but we know that the three mining giants understand the cost of doing business with a government who hasn't only attempted to use diplomatic channels in the past to negotiate ore prices, but can actually detain a vendors sales reps. The press may have forgotten, but Rio hasn't, we're sure.

Timing Will Be Late.

In December,

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Vale

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announced plans to delay iron ore contract discussions until the first quarter as surging iron ore spot prices, a volatile and uncertain demand environment, and a potential merger between the world's second and third-largest iron ore suppliers would likely complicate both the timing of discussions as well as the outcome.

We think this was a smart move, as steel prices have soared in the last two months and current spot iron ore prices are double the average contract price for 2009.

Impact on Steel Producers.

Higher iron ore prices are bullish for the domestic steelmakers and

ArcelorMittal

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because these players are meaningfully more integrated than their global peers so that the higher global iron ore prices go, the more competitive advantage the domestic players have.

Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.