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Nation steels itself against further price hikes
By Xie Ye (China Daily)
Updated: 2005-04-09 06:26

Steel makers adopted a hard line during negotiations with Australian mining company BHP Billiton Ltd on the price of iron ore, claiming they would not accept any unreasonable requests "under any circumstances."

The China Iron and Ore Industry Association, representing 16 major domestic steel makers, said on Thursday that BHP's demand for a premium on prices of iron ore violated international practices.

"Their behaviour will destroy the four-decade-old negotiation mechanism for international ore prices, and will severely damage the development of China's iron and steel industry as well as China's economy," the association told Xinhua News Agency.

The remarks came after BHP requested an extra US$7.5 to US$10 a ton following a hike in global prices of 71.5 per cent this year alone.

Xinhua reported that Chinese companies would not kowtow to BHP's demands, even if they have to cut steel output.

"Chinese companies have prepared, and hammered out plans to cope with the worst case scenario," said the report.

The association refused to comment on the report on Friday.

A spokeswoman from Shanghai Baoshan Iron and Steel Company, one of the 16 firms, told China Daily that the association and her company's stance were one and the same.

China, the world's largest steel maker, imports about half of its consumption of iron ore - the raw material required to produce steel. The country imported 208 million tons of it in 2004.

Australia is the biggest exporter of iron ore to China, making up 37 per cent of China's imports last year.

And it is estimated that BHP accounted for one-third of all shipments from Australia.

Industry analysts said the price hike would erode the profits of steel makers because they would have trouble passing on the costs due to an oversupply of steel.

Excessive capacity

China's steel production capacity is expected to increase by 15 per cent this year, while demand is to rise no more than 10 per cent, according to Wu Xianfeng, a steel industry analyst with Guotai Jun'an Securities (Hong Kong).

On Friday, Baoshan Iron and Steel shed 2.2 per cent to end at 6.15 yuan (74 US cents) on the Shanghai Stock Exchange. Wuhan Iron and Steel Co Ltd, another major steel firm, dropped 3.5 per cent.

The two companies have slumped 6.5 per cent and 10.3 per cent respectively since February 23 when news broke that the price of iron ore would increase by 71.5 per cent industry-wide.

More industries affected

But the steel industry is not the only one struggling to cope with the price hike. Big steel consumers, such as the automobile, home appliance, shipbuilding and real estate sectors will be hardest hit as the increase is passed on.

China's economy, as a whole, is also likely to suffer.

Niu Li, an economist with the State Information Centre, said the upswing in raw material prices, including oil, coal and steel would fan the flames of inflation.

Zhou Wei, an analyst with Xiangcai Securities, said the increases may press the central government into increasing the interest rate by 50-70 basic points this year.

Beyond its economic significance, the iron ore issue could also have political repercussions, Chinese officials warned.

"The continuous iron ore price increase will damage relations between China and Australia," said Ma Xiuhong, vice-minister of commerce during a recent seminar on a Sino-Australia free trade agreement, last month.

The China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters said in a statement on Friday: "The behaviour of some of our suppliers goes against international trade practices, and damages the long-term stability of the international iron ore market.

"To keep the price at a reasonable level complies with the long-term interests of both buyers and sellers. Any move to impose one's demand on others is undesirable."

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