China Haunted by High Iron Ore Prices

The iron ore price negotiation in 2009 left Chinese steel enterprises a complete mess hard to be settled.

During last April and May, the iron ore trades between Chinese steel enterprises and the three iron ore suppliers (BHP Billiton, Rio Tinto and Vale) were still settled at the long-term agreement price in 2008 because the iron ore price negotiation of that year has not been finished. In truth, no agreement was reached upon the iron ore prices for China in 2009, making the Chinese steel enterprises suffer unaccountable losses. In order to change this adverse situation, some steel enterprises sent their staff to Singapore to conduct negotiations with the three iron ore giants. The Chinese Iron & Steel Association (CISA), which once represented Chinese steel enterprises in the negotiation, gradually gave up this role.

Loss of Steel Enterprises

The failure to reach agreement of 2009 iron ore price negotiation left the Chinese steel enterprises a tough problem.

It was known that the Chinese steel enterprises began to buy the iron ores from the three giants with long-term agreement price. The detailed price was temporarily 20% lower than the 2008 long-term agreement price. On a regular basis, when the new long-term agreement price was settled, the iron ore supplier should refund for any overpayment or the steel enterprises should make a supplemental payment for the deficiency.

But things went on beyond expectation: the iron ore negotiation between steel enterprises and iron ore suppliers in 2009 was long and thorny. On May 26, 2009, Rio Tinto and Nippon Steel reached an agreement that the prices of fine ores ad lump ores respectively decreased by 33% and 44% compared with 2008.

Because the decrease was less than 40% as expected by Chinese steel enterprises, the CISA refused to accept this price. Instead, it continued to talk with the three iron ore suppliers. However, some Chinese enterprise began to buy the iron ores at the agreed price.

As the demand for steel increased, the iron ores began to see their price go up again. Therefore, the CISA’s appeal was harder to be achieved. But the words came faster than deeds. The CISA could no longer accept the agreed price.

A source said that the long-term agreement price was higher than the agreed price despite the discount. Therefore, BHP Billiton, Rio Tinto and Vale should refund the Chinese steel enterprises the extra payments. However, the three suppliers refused to return the payments because China didn’t accept the agreed price. The Chinese enterprises had to suffer these losses without any complaints.

Too Much Extra Cost

Furthermore, the Chinese steel enterprises for the first time met the problem of iron ore price settlement.

Taking Rio Tinto for example, its fines ore was priced at 1.4466 US dollars per dry metric ton unit (mtu). If the price was settled at 80% of 2008 long-term agreement price, Rio Tinto’s Yandy iron fines should be priced at 73.49 US dollars. However, the price should be 61.60 US dollars according to the 2009 agreed price. In that way we can see the Chinese steel enterprises had to pay 11.89 more US dollars than the Japanese and Korean peers.

According to the data, China imported 57 million tons and 53.46 million tons of iron ores in April and May 2009. It was estimated that 6959 tons of iron ores were from Brazil and Australia.

We assumed that these iron ores from Brazil and Australia were all traded at long-term agreement price. The Chinese enterprises had to pay 827 million US dollars more for the iron ores in these two months.

This made the Chinese enterprises, which entrusted the CISA to attend the iron ore negotiation with suppliers, shoulder huge extra cost alone.

“The CISA acted and responded slowly in the negotiation and failed to reach the agreement with the main suppliers. It hampered us from getting our overpayments back. We were not satisfied with the CISA,” said an insider from a large Chinese steel enterprises. According to a source, the steel enterprises hoped the CISA could settle the price as soon as possible, which enabled the steel enterprises to complete the whole financial budget.

Steel Enterprises in Negotiation

Bad news all comes together. In 2010, the three main suppliers seemed to intentionally exclude China from the negotiation from the start. The past negotiations were held in China but this time it was held in Singapore.

An expert said: “Last year’s negotiation ended with nothing. This year the negotiation was held in another country. The three main iron ore suppliers are always in a superior place to China in the negotiation. Their attitudes seem to be telling us: you want to talk, then you come. It’s no concern of us!”.

The three main suppliers’ arrogance didn’t come out of nothing. After one year’s fluctuation, the spot price of iron ore kept increasing from last March’s 60 US dollars/ton to today’s 130 US dollars/ton. The gap between spot price and long-term agreement price kept enlarging. In order to offset their loss, the iron ore suppliers are all trying their best to increase the long-term agreement price. The only uncertainty is how much they want to increase.

On the other had, the outside circumstance also underwent great changes. In December 2009, India increased its export duty for iron ores in order to support its own steel industry’s development and gradually changed from iron ore exporter to importer.

According to the data, 20.3% of imported iron ores of China in 2008 came from India. India’s refusal to export iron ores aggravated the contradictions between demand and supply in the iron ore market. This also forced the Chinese steel enterprises to buy more iron ores from the three main suppliers, which pushed China into a more adverse side in the negotiation.

In order to avoid last year’s situation, some Chinese steel enterprises had to hold the negotiations with the suppliers by themselves.

CISA “Absent” from Negotiation

Last year’s failure deprived the CISA of the representative of Chinese steel enterprises in the iron ore price negotiation. Therefore, in this year’s negotiation, the Chinese largest steel enterprise Baosteel played the role of representative while the CISA retreated to the backstage for coordination.

On January 27, Zhu Hongren, spokesman for the Ministry of Industry and Information Technology (MIIT), said that the MIIT would cooperate with the relevant department to give support for the CISA to conduct negotiations with the foreign suppliers. However, Baosteel is still the representative in the negotiation.

In fact, it was known that the CISA is busy preparing for the standing director conference after the visit in Brazil, Japan and Korea. Though some steel enterprises sent people to Singapore to talk with the three main suppliers, the CISA didn’t give out any opinions or send people to Singapore.

When the negotiation turned to the positive side for the Chinese steel enterprises last year, the CISA held a tough and unyielding attitude and finally resulted in the failure. When the 2010 negotiation started, the CISA made little voice during the process.

The Chinese steel enterprises felt disappointed at the CISA’s failure to set the long-term agreement price, which made them suffer great losses. Therefore, they no longer wanted the CISA to represent them in the negotiation.

But the CISA’s quit couldn’t change the adverse situation of China in the iron ore price negotiation. According to the expert, this year’s negotiation may end in the same way of last year’s, which is that the Japanese and Korean enterprises set a price with the suppliers and China had to accept it.