Monday 3 November 2008
China Expects Upper-hand in Imminent Iron Ore Haggle
The annual negotiation for the next year’s iron ore supply contract will be launched in November. Steel industry representatives from China, Europe, and Japan will meet with the world’s three major iron ore mining giants to decide the long-term contract price for 2009.
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China Expects Upper-hand in Imminent Iron Ore Haggle
3 November 2008
The annual negotiation for the next year’s iron ore supply contract will be launched in November. Steel industry representatives from China, Europe, and Japan will meet with the world’s three major iron ore mining giants to decide the long-term contract price for 2009.
With the global economy in a downturn, steel makers have been forced to cut steel production and the market has increasingly turned towards the buyers’ side.
Due to over-importing earlier this year, China holds large iron ore stocks in its major ports, the latest statistics showing piles totaling 71.92 million tons last week, up 0.36 million tons over the previous week.
Luo Bingsheng, executive vice-chairman of the China Iron and Steel Association (CISA) said recently, “Global iron ore demand is declining, and supply has exceeded demand. This will certainly affect the international iron ore price next year. The current situation is helpful to China’s iron ore negotiation for the new year, which is to be launched soon.” Mr. Luo added that since steel makers already hold large stocks, they can maintain normal production without importing iron ore for three or four months.
Baosteel will negotiate with overseas suppliers on behalf of Chinese steelmakers. Chen Ying, secretary to the board of Baosteel, said last Wednesday that since the basic market situation had changed greatly, the market would respond to the wrong choice made by some single suppliers at a wrong time, and that the market would return to a rational level next year. He was referring to Vale’s attempt this year to up its prices after having signed a long-term contract.
The three iron ore giants predict the demand decline in China will not last long. After Chinese steel makers announced production cuts in November last year, VALE estimated China’s iron ore demand would rebound in 2009, because in that time China will run out of all the iron ore stock and other mineral suppliers will not be able meet its demand. VALE still maintains its plan to increase iron ore production by $14.2 billion in the middle of next year.
Rio Tinto, Australia’s biggest iron ore producer, has the same idea. CEO Tom Albanese has said that China’s demand decline was led by China’s tight monetary policy, and would not last long. According to him, China’s economy will maintain about 8% to 9% annual growth. With the implementation of new policies, demand will rebound next year.
But international investment banks are shorting the iron ore market. Macquarie Group estimated that BHP Billiton and Rio Tinto, the two Australian giants, would be forced to drop iron ore prices for 2009, the first big financial firm to do so. Following Macquarie, UBS also predicted the first long-term contract price decline in the last seven years for 2009, by 15%. Recently, UBS re-estimated the price decline to be 40%.
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