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Spot option looms large on steel industry's radar

By Jiang Wei (China Daily)
Updated: 2009-06-18 08:09

Iron ore being unloaded at the Rizhao port in Shandong province. [China Daily]

China's steel industry is at a delicate stage in negotiations with global miners for this year's iron ore supply contract price.

After Japanese and South Korean steelmakers inked new contracts with major suppliers recently, China became the only key importer left undecided in Asia with just days to go before last year's iron ore supply contract expires on June 30.

And, the proposed alliance between two of the largest miners in the world, Rio Tinto and BHP Billiton, is also increasing pressure on China during the negotiations.

Most industry analysts said Chinese steel firms would either accept prices already agreed to between miners and other Asian mills, which is for a 33 percent price cut on fine ore, or surrender the security of annual contracts for the vagaries of the spot market.

With only two weeks left for the deadline, the China Iron and Steel Association (CISA), which is leading the discussions, is insisting on a 40 percent price reduction for iron ore from Australia.

Related readings:  Steel industry has net loss in first four months  China steel association opposes Rio-BHP iron ore JV  Steel mills say no to Rio cuts  Steel industry faces period of structuring

The global iron ore supply surplus is estimated to be between 200 million and 300 million tons, the CISA said. Chinese steel mills will see large losses if they agree to a 33 percent price cut this year, it said.

Many insiders said even if China fails to ink the deal with suppliers before the end of this month, it is unlikely to be a disaster for China's iron ore imports.

The Chinese side is probably seeking a new quarterly pricing system, which better reflects the changes in the market, sources said.

It means China will accept the current benchmark price but ask for quarterly adjustment on the figures in accordance with the ups and downs of steel mills' costs and prices.

Another possible outcome is that Chinese buyers and their suppliers turn to the spot market. In fact, a major reason the Chinese side rejected the 33 percent price cut was that the rate was at least $5 higher than the current spot market price.

Hu Kai, an analyst with Umetal.com, said the spot market would be the decisive factor in the country's iron ore imports if the ongoing negotiations break down.

He said the supply chain would continue working smoothly on the spot market because many domestic steelmakers and international miners had been using this as a major business model of late.

The proposed alliance between Rio Tinto and BHP Billiton is expected to further strengthen the miners' say in global iron ore trade, and the Chinese government has already expressed strong opposition to the proposal.

An official with the Ministry of Industry and Information Technology said the proposal had a "strong monopolistic color".

Chen Yanhai, head of the raw material department of the ministry, said at an industry meeting held in Anshan, Liaoning province that the "joint venture was likely to have a big impact on the Chinese steel industry as China is the world's biggest iron ore importer."

Chen also said if the tie-up was found to be monopolistic, then China might have to seek new policies and regulations to enable its companies to have a bigger say in iron ore price talks.