Steel mills dig in overseas
Chinese steel companies -- trying to break foreign giants' price monopoly over iron ore and secure long-term, stable sources of raw materials -- are going abroad to mine iron ore through co-operation deals with foreign partners.
Four big Chinese steel makers recently agreed to acquire a 40-per-cent share in a mine owned by Australia-based iron ore producer BHP Billiton.
The mills expect the iron ore they purchase from the mine will be worth about US$9 billion over the next 25 years.
The stake in BHP Billiton's Jimblebar mine, about 30 kilometres from Newman, in western Australia, should guarantee the mills receive 12 million tons of ore annually for the next 25 years.
The steel makers -- Wuhan Iron and Steel (Group) Corp (Wugang), Maanshan Iron and Steel Co Ltd (Magang), Jiangsu Shagang Group Co Ltd (Shagang) and Tangshan Iron and Steel (Group) Co Ltd (Tanggang) -- will each hold 10 per cent of Wheelarra, a joint venture that will produce and ship the iron ore.
Wheelarra is to be established after the deal is approved by the Chinese and Australian governments.
BHP Billiton will retain a 51-per-cent interest, while CI Minerals Australia and Mitsui Iron Ore Corp will hold 4.8 per cent and 4.2 per cent, respectively.
Wugang and Tanggang will each receive 3.5 million tons of iron ore annually, while Magang and Shagang will each receive 2.5 million tons.
BHP Billiton has agreed not to sell ore to the Chinese firms for more than the average international price, Global Business and Finance magazine reported recently.
The deal is the largest between Chinese iron and steel makers and a foreign company, and the first pact to bring four Chinese steel mills, operating in different provinces, together in a joint venture.
Officials from the four steel mills refused to comment on the deal, and they declined to provide details of their investments in the venture.
The contract has not been finalized, and everyone is waiting for approval from the "relevant ministries," said a high-ranking official with Magang.
"This deal, the first of its kind in China, will help the Chinese steel mills secure a long-term, high-quality and stable source of iron ore," said Dong Zhihong, vice-director of China Iron and Steel Association (CISA)'s market investigation and research department.
"It also gives Chinese firms a chance to have a say in negotiating iron ore prices within international trade."
STEEL: Stable source of ore vital to industry
Although China imports substantially more iron ore annually compared with Japan, Chinese steel mills are relatively small and scattered around the country. As a result, they have little impact on price-setting and, therefore, often do not receive the best, or fair, prices.
Experts have suggested Chinese mills should form an alliance for negotiating prices for raw materials to ensure they receive the best prices, and to enhance their competitiveness.
"Chinese steel enterprises are often at a disadvantage when negotiating individually with overseas iron ore providers, because they are scattered and many are small producers," Dong said.
"They should unite together to make their voices louder."
Wugang is the third-largest steel maker in China; Tanggang, sixth; Magang, seventh; and Shagang, 13th.
Industry experts predict the union of the four mills will help resolve that situation.
Global production of iron ore is currently controlled by Australia-based Rio Tinto, BHP Billiton and Brazil's CVRD.
They supply 70 per cent of the world's iron ore exports. As a result, they have a strong say in global iron ore prices.
Iron ore mined by Chinese companies overseas accounts for only 21 per cent of the iron ore imported by China, indicate CISA statistics.
"This proportion is expected to rise in the near future," Dong said.
Shanghai Baosteel Group Corp, China's largest steel maker, last week signed a deal with Rio Tinto to acquire 46 per cent of the eastern range of the Hamersley iron ore mine in western Australia.
Rio Tinto will hold the remaining shares.
It initially cost US$64 million to develop the eastern range.
China's demand for iron ore is surging, due to the boom in the steel consumption corresponding with the nation's fast-economic growth.
CISA predicts China will produce 277 million tons of steel products this year, up 14.84 per cent year-on-year, and that consumption will reach 280 million tons, up 13 per cent year-on-year.
China last year imported 148.12 million tons of iron ore, up 32.87 per cent year-on-year. That made China the world's largest iron ore importer. CISA predicts China will import 33 million tons more this year to meet demand.
"Relying on both domestic and overseas mineral resources has been a basic strategy for China's steel industry," Luo Bingsheng, CISA's executive vice-chairman, once said.
"Large imports of iron ore are inevitable, as the grade of China's iron ore reserves are relatively low."
China has more than 40 billion tons of proven iron ore reserves.
However, the average grade of China's iron ore is 32.7 per cent, indicates China's Steel Industry Yearbook.
The grades of Brazil, Australia and South Africa's iron ore exceed 55 per cent.
Last year, China imported 58.12 million tons of iron ore from Australia, up 35.87 per cent year-on-year; 38.39 million tons from Brazil, up 28.98 per cent year-on-year; 32.27 million tons from India, up 43.26 per cent year-on-year; and 9.55 million tons from South Africa, down 7.18 per cent year-on-year.
Some small steel mills will be washed out of the market unless they find stable sources of raw materials, CISA officials said.