China Has an Edge in Iron Ore Price talks

In the past years, China is always the losing side in the iron ore price talks with the international suppliers. Does China have an opportunity to turn the situation around this time?

A global iron ore oversupply, lower spot prices, and huge stockpiles in China’s domestic iron ore market will improve the odds of Chinese steel mills in securing more cuts in its iron ore price negotiation with overseas suppliers, Du Wei, an Umetal analyst said on June 2.

China Iron and Steel Association (CISA) refused on May 31 to accept the iron ore price cut between 33 percent and 44 percent reached between Rio Tinto and Japan’s Nippon Steel Corp, and insisted on a price cut of more than 40 percent in the annual contracts of iron ore.

Analysts and insiders believe an estimated global excessive supply and a considerable decline in demand impose great pressure on the miners amid the economic downturn.

“The global iron ore supply surplus is estimated to be between 200 million and 300 million tons,” said Luo Bingsheng, vice chairman of the CISA in Shanghai at the beginning of June.

Total iron ore demand is expected to drop between 150 million and 200 million tons this year, according to Xu Xiangchun, chief information officer of Mysteel.com on June 3.

Luo also said China’s steel maker would turn to the spot pricing, abandoning the benchmark price system, if the suppliers deny its 40 percent to 50 percent price cut request.

“Despite a 33 percent price cut, the long contract price is still 8 to 9 US dollars higher than the spot price,” said Du Wei.

Huge stockpiles should prompt China’s steel makers to call for bigger cuts in iron ore prices in the progressing negotiation, Du said.

The latest data from the www.umetal.com shows that iron ore stocks at Chinese main ports exceeded 70 million tons as of May 31.

Du estimated that China’s overall stocks had surpassed 110 million tons in consideration of 30 million tons of stocks by steel plants.

However, analysts and insiders believe the negotiation will drag on beyond the end of June.

According to Luo, China’s steel mills lost 5 billion yuan (USD 732 million) in the first four months this year due to the financial crisis and the increasing iron ore pices.

If the CISA compromises, the long contract price would be set at a high level during the peak season, and China’s steel plants would suffer more in profit loss resulting from high costs, said Du.

“We have not set a deadline of when the negotiation would end. Even if the two sides had not reached the deal by the end of June, it would not affect the production of China’s steel plants,” said Shan Shanghua.

The iron ore negotiations between China and the three international mining giants – BHP Billiton, Rio Tinto and Vale – have been held for several years with once or twice a year. The foreign companies took advantage of the growing production capacity of the Chinese steel enterprises, to ask for the higher prices of the iron ores. The increase rate even reached more than 60% in last year.

The Chinese steel enterprises suffered a lot of loss because of this. The CISA is formed to represent the Chinese steel enterprises to take part in the negotiations. People hope that the CISA can bring changes to this situation this time.