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Tuesday, August 18, 2009

China freezes talks on ore price John Garnaut, Shanghai

Monday, 17 August 2009

THE tough-talking China Iron and Steel Association is failing to talk at all with its iron ore negotiating partners, as steel mill members ignore its directives and entrench the Japanese benchmark price as their own. "Nobody is talking to anyone," said a well-placed executive at a large mining company, adding that none of the three major iron ore miners had any incentive to initiate further official negotiations.
Vale and BHP Billiton have said they will take a back seat, while Rio Tinto's China iron ore sales team was formally arrested this week for stealing commercial secrets and bribery.
'The major iron ore suppliers all tell me that nobody's talking to anyone," said Francis Browne, iron ore analyst at Platts.
"They had found themselves in the situation where they're actually negotiating with a government, and a government that is proving itself to be unpredictable."
While CISA continues to talk tough publicly but prevaricate behind closed doors, Chinese steel mills are widely signing deals for Australian and Brazilian iron ore at the benchmark price accepted by Nippon Steel on May 26.
Analysts say the Chinese mills, which operate in the world's largest, fastest-growing and most competitive steel industry, have chosen to accept the realities of the market rather than unrealistic official directives.
"Business is business," said Jim Jia, principal at Shanghai consultancy Mysteel. "We need your iron ore, you need to sell your iron ore."
Jia said China, through CISA, might not officially agree to any benchmark price this year but that would have no impact on the actual market.
The de facto benchmark contract deals are being led by China's largest state-owned mills despite renewed official directives to present a united negotiating front and deep industry anxiety over reports that steel mill executives are being investigated for their dealings with Rio Tinto's Stern Hu.
"All the major steel companies are paying the Japanese benchmark price regardless," said the mining executive.
The breakdown of China's official negotiating position is the latest chapter in CISA's histrionic but hapless efforts to muster China's buying power against what they see as the Australian and Brazilian iron ore "cartel".
CISA lost the negotiating initiative when Nippon Steel struck the first benchmark price deal at $US61 a tonne for iron ore fines on May 26,representing a 33 per cent cut from last year's benchmark price.
At the time, the price of iron ore on the Chinese domestic spot market was $US51.25 but by yesterday it had soared to $US89.45, according to Platts (after excluding freight costs for comparison with benchmark pricing).
CISA held out - and is still holding out - for a 40 per cent price cut while the supply and demand balance has taken off in the other direction.
Official figures this week showed China's steel production and iron ore imports had both hit records, while BHP Billiton chief executive Marius Kloppers estimated China's domestic iron ore production had fallen 70 per cent because of low prices.
Chinese iron ore prices tend to track steel prices, which have risen about 30 per cent since April on the back of ample credit and China's steel-intensive economic recovery.
Steel prices appeared to peak three weeks ago and iron ore prices may now be following suit, with prices dipping in recent days.
CISA, led largely by retired government officials and steel executives, has long been the subject of private jokes in the Chinese steel industry. But in the past fortnight those criticisms have burst into the public sphere, as CISA continues to demand that steel mills unite to pay a consistent "unified" price for imported iron ore.
Last week veteran steel consultant and academic Xu Zhongbo was given air time to slam the steel association on a prominent China Central Television news program.
"It's not professional for CISA to practise a 'strike hard' campaign when it has no experience in international trade," he said. "It's very annoying this year. At the start, the situation was very good and it seemed like a must-win negotiation. But when the deadline arrived there was no result. Now, no one can predict when the result will come out so CISA needs to find excuses."
On Thursday, the government official ultimately responsible for iron ore negotiations, Industry and Information Technology Minister Li Yizhong, seemed to canvass the possibility of allowing Baosteel to retake the lead negotiation position from CISA. ''We should pick one entity," he said. "It would be reasonable for CISA or Baosteel to represent China's steel industry in talks with the three top miners.''
''As the world's largest iron ore importer … China should have some say in iron ore trade. But I think we don't have enough influence now," Li said.
Source: The Age