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Home > Commodities June 05,2009

By CSC staff, Shanghai On May 26, Rio Tinto and Nippon Steel reached an agreement on a 33% reduction in the price of iron ore.  China Iron & Steel Association (CISA) waited four days before playing its trump card and refusing, on behalf of all China’s steel producers, to accept the “starting price” negotiated with Japan.

The international long-term contract price of iron ore has been on the rise since 2003, costing China, the world’s largest buyer, more than $39.8 billion over the past 6 years.  The question being raised by industry-watchers: in 2009,  given the ongoing international financial crisis, will this story continue in the same vein?

From CISA, to state-owned steel companies, to government officials from the Ministry of Commerce, the opinion is being advanced that the domestic steel industry, which has been in dire straits for the past few years, is being caught up a conspiracy led by iron-ore producers BHP Billiton and Rio Tinto.

CISA has two significant chips to play in its bid to obtain a further reduction in the long-term contract price for iron-ore.  First, it is estimated that the global iron ore surplus will reach 150-200 million tons by the end of 2009.  Second,  the spot price for ore is lower than the long-term contract price.

Despite these factors, between January to April of this year,  a transnational “conspiracy” was being plotted.  The Australian mining companies, represented by Rio Tinto and BHP Billiton, have worked to undermine China’s position at the negotiating table, employing three tactics that have forced China to make concessions.

The first tactic has been comprehensive dumping on the Chinese market.  The three largest mining companies – Rio Tinto, BHP Billiton, and CVRD – abandoned the strategy of “limiting production and keeping prices.”  The Australians have suppressed the Indian ore producers and China’s domestic mines, seizing market share in China, and depleting their own ore stock, allowing them to own the “bottom” in the Chinese ore market.

The second tactic has been to raise the spot price.  At the end of May, Rio Tinto reached an agreement on price with Japanese and South Korean steel-producers, which did not meet the 40% to 45% deccrease China had demanded.  Rio Tinto and BHP Billiton started to reduce the supply to China’s spot market, and speculate on sea freight.  These two measures served to raise China’s spot price, narrow the spread between long-term contract ore and spot ore, and undercut the efforts of Chinese steel-makers to lower the spot price.

Since May and June are the traditional peak months in the domestic steel market, normal market factors will reinforce these attempts to push up the spot ore price.  If CISA concedes to this tactic, domestic steelmakers face peak-season prices throughout the year.

The third tactic has been the courting of CVRD by Rio Tinto and BHP Billiton to prevent its alliance between CVRD and Chinese steelmakers.  To accomplish this, Rio Tinto and BHP have raised sea freight rates to magnify CVRD’s disadvantage in long distance shipping. During the 15 trading days ended June 2, the rates for sea freight from Brazil to China has more than doubled from $10 / ton to $ 25 / ton.  This means that, due to additional sea freight costs, Australian ore has a cost advantage of $ 25 / ton over Brazilian ore, making Australian mines the preferred source for raw materials.

Chinese steelmakers have thus far resisted the negotiating strategy of Rio Tinto and BHP Billiton and the conflict between the two sides is expected to intensify in June.

Chinese negotiators acknowledge that their refusal of the Japanese “starting price” will bring pressure on Chinese steelmakers, but believe that the ore sellers will be impacted even more.  Shan Shanghua, secretary-general of CISA, noted that “We have no hard and fast rules on the negotiation time. When to conclude the negotiation will be decided by both sides.  Even if the negotiation do not conclude until the end of June, it will not affect the production and operation of major domestic steel enterprises.”

(China Securities News, affiliated to the state-owned Xinhua News Agency, contributed to the article.)