Tuesday 23 June 2009
China Steelmakers Resisting BHP/Rio Dominance, Reaching Out to Diversify Ore Sources
According to the current situation, if China does reach a long-term supply contract with Vale and FMG, and its negotiation with BHP and Rio breaks up, the future iron ore supply and pricing system will gain diversity.
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China Steelmakers Resisting BHP/Rio Dominance, Reaching Out to Diversify Ore Sources
23 June 2009
ArcelorMittal, the world’s largest steel maker, has finally accepted the 2009 long-term contract iron ore price reached between Japanese and Korean steel companies and Brazil’s Vale, the world’s largest mining company. According to the contract, prices for powder ore will be cut by 28.2%, for lump ore 44.47%, and for pellet ore 48.3%, on the basis of prices in the fiscal year 2008.
With the emergence of the “European price,” Chinese steel makers are now completely isolated in the annual iron ore negotiation. Meanwhile Chinese steel makers are threatening to cut imports from Australian miners BHP Billiton and Rio Tinto and diversify their sources of iron ore supply.
Overseas mining companies do not seem in a hurry to reach agreement with Chinese steel makers. BHP has been promoting its spot index pricing system, while Rio readily selling its ore on China’s spot market. Vale is the only one of the top three ore suppliers that appears eager to sign long-term supply contract with Chinese companies. If Chinese steel makers fail to reach agreement with iron ore suppliers before June 30, either party has the right to rescind the contract.
This convention, however, seems to be meaningless this year. “To conclude the negotiation before June 30 is only a traditional concept. In fact, the traditional iron ore pricing mechanism has been broken since last year,” says Shan Shanghua, secretary general of the China Iron & Steel Association (CISA). China raised the idea of “Chinese model” at the beginning of this year’s negotiation, under which China would negotiate with several mining companies, including emerging companies such as FMG, and the prices for ore from different companies wouldn’t necessarily be the same.
A senior official from a large domestic steel maker reveals that Chinese companies are very likely to decide iron ore prices by purchasing amount, according to which China will negotiate with different suppliers separately for the amount and price, and cut the purchasing amount from Australian suppliers by about 10%.
Iron ore from Australia accounts for 40% of China’s total imports, the highest among all countries, while those from Brazil account for only 20.5%, and FMG can now supply China with only 40 million tons of iron ores every year. China is the world’s largest iron ore importer, and the iron ore supply as a whole outruns demand, which CISA sees as its leverage in the negotiation. CISA figures show that, in the first four months of this year, the global iron ore surplus reached as high as 200 million tons, and the major increase in iron ore import was from China.
The disorder in China’s steel production and iron ore import, however, makes difficult the Chinese position in negotiation. In the first ten days of June, according to CISA, China’s daily crude steel production totalled 1.498 million tons, more than the 1.4854 tons in the last 11 days in May. Calculating according to the daily crude steel production in June, China’s 2009 crude steel production will reach 547 million tons, higher than the 500 million tons produced last year, and exceeding CISA’s goal of 460 million tons.
A boom in spot imports has also lifted the FOB price for medium quality spot iron ore from India by 10% to 12% in the past 30 days to a level close to the long-term contract price reached between Nippon Steel Corporation and Rio Tinto.
Shan Shanghua said recently that, jointly with relevant departments such as the Ministry of Commerce, CISA would launch an investigation on excessive iron ore import, and dealers illegally selling imported iron ores would have their import qualification suspended.
The iron ore negotiation is now approaching the deadline. Shan Shanghua recently met with senior officials from Vale and FMG and exchanged opinions on iron ore cooperation. Industry insiders think CISA’s recent moves were to send a signal that in future China will develop more trading partners to make itself less independent on BHP and Rio.
Some changes have emerged in the negotiation. While Rio and BHP maintain a tough pose, Vale is displaying more flexibility. The company released a statement on June 12, saying it was “very willing to reach a 2009 iron ore contract price with steel makers in China, a very important market.” FMG, having cooperated with Hunan-based steelmaker Valin, is expanding its production capacity and will hopefully become another major iron ore supplier outside the three traditional giants.
According to the current situation, if China does reach a long-term supply contract with Vale and FMG, and its negotiation with BHP and Rio breaks up, the future iron ore supply and pricing system will gain diversity.
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