5 Nov 2010 10:00

China unlikely to wrest long-term iron ore contracts from miners

Shanghai. November 5. INTERFAX-CHINA - It is unlikely that the use of long-term iron ore contracts will be re-introduced, a senior official with the China Iron and Steel Association (CISA), which represents China's major steel mills, told Interfax on Nov. 3.

A number of reports in China's state-controlled media have speculated that the CISA is pressing for the resumption of an annual iron ore pricing system after it announced on Oct. 29 that it launched a new round of negotiations with global iron ore suppliers concerning next year's purchases.

CISA's vice secretary-general, Chi Jingdong, told Interfax that, while the main topic to be addressed at the talks will be the iron ore pricing mechanism used by China's steel mills and global iron ore miners, the miners are resolutely sticking to the new pricing model, which is based on a quarterly system.

Which pricing mechanism is used and the index price are matters that should be discussed together in formal talks, and not solely decided upon by iron ore suppliers, said Chi.

"While iron ore miners are enjoying huge profits, the majority of China's steel mills are struggling," according to Chi. "Steel product profit margins are now incredibly low, standing at between only RMB 30 ($) and RMB 50 ($) per ton. Around 50 percent of China's mills are barely making any profit."

"We do not want a system that is biased toward China, nor do we want a system that solely benefits the interests of global miners; instead we hope to develop a long-term and sustainable relationship that is beneficial to both sides," Chi added.

If China's steel mills are forced to close, there will be no market for iron ore suppliers, Chi also pointed out.

China imported 457.6 million tons of iron ore in the first nine months of 2010, a decrease of 11.53 million tons from the same period of last year. Chi told Interfax that increasing domestic production of the raw material and the expectation of a static crude steel output level in the future will see such imports maintain their current level during the period of the twelfth Five-Year Plan (2011 - 2015), or even drop.

According to Umetal statistics, China produced around 780 million tons of iron ore in the first nine months of 2010, an increase of 25.9 percent year-on-year.

While increasing industrialization and urbanization in China means the market is anticipating a strong domestic demand for steel products, it is not strong enough to support such high iron ore prices, Chi told Interfax.

A senior employee surnamed Yuan with Baoshan Iron and Steel Co. Ltd. (Baosteel) agrees it is unlikely that the long-term pricing contract will not be reinstated.

Speaking with Interfax, Yuan said that the bargaining power that many believe China will have as a result of weakening market demand will ultimately be overshadowed by the strength of the global iron ore miners.

"Our position is weakened not by our huge demand for the raw material, but by the monopoly control of the iron ore market," said Yuan. Efforts being made to regain some control by increasing domestic iron ore output and overseas investments are likely to have little effect, he added.