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China steel mills, global ore miners in deadlock

THE stand-off between China's steel mills and the world's major iron ore miners continues after the June 30 deadline to agree on ore prices for the next 12 months.

But who will blink first in the ongoing guessing game over how the global economic slowdown will affect the future of supply and demand? The side with the best view of future prices will win the negotiations, say analysts.

Both the China Iron and Steel Association, which heads the talks on behalf of major Chinese steel mills, and ore producer Rio Tinto are refusing to comment on the progress, except to say talks are continuing.

The three iron ore giants -- Vale of Brazil, Rio Tinto and BHP Billiton -- have settled the 2009-2010 iron ore price contracts with major steel makers elsewhere in Asia and Europe, agreeing on price cuts ranging from 28 to 33 percent. This would equal to US$75-US$80 per ton, including freight costs.

Once Rio Tinto settles the 2009-2010 contract prices with the CISA, Vale and BHP Billiton will follow or set their own prices after further talks, says Wang Guoqing, a Beijing-based analyst with Lange Information Consultation Co.

Rio Tinto is sticking to its offer of a 33 percent price cut for 2009-2010 contracts, while the CISA insists on a deeper cut.

"We have agreed on price settlements in a number of major markets this year, but not in China," said Rio Tinto spokesman Gervase Greene in an email to Xinhua news agency on Tuesday. "We are officially in discussions still, and will not speculate on how our discussions are faring, or why."

However, the CISA believes the 33 percent price cut "failed to reflect the real supply and demand situation on the international market and would lead to overall losses for Chinese steel companies."

Bleak outlook

The steel makers' confidence comes from bleaker expectations of a quick recovery of the world economy and that demand for iron ore would remain weak. Their determination is supported by a global ore supply surplus estimated at between 200 million and 300 million tons.

"Iron ore demand would surely be lower in 2009 than in 2008, and a current oversupply situation, in which falling steel production is occurring as iron ore production capacity increases, will not go away soon," said a report from the United Nations Conference on Trade and Development released last Friday.

The UNCTAD expected world steel demand to fall as much as 15 percent this year.

As the world largest iron ore importer, China imported 443 million tons of iron ore in 2008, more than half of the world's total shipments.

Zou Jian, a CISA official, expected the country's iron ore imports to fall to 350 million tons this year.

The CISA's confidence was also firmed up by China's iron ore inventory of 100 million tons, which, CISA officials say, could feed domestic mills for three months.

China could also turn to iron ore miners other than the foreign giants.

If the talks failed, CISA General Secretary Shan Shanghua said earlier that China might opt for spot market purchases or slash steel output.

In contrast, iron ore suppliers are betting on resumed demand boosted by China's massive infrastructure construction and improvement in the real estate sector, said analysts.

They are confident that China's steel industry has bottomed out and showing signs of recovery this year because China has seen continuous steel price rises since April and growing steel output, says Hu Kai, a Shanghai-based analyst with Umetal Research Institute. The outlook is improving, which would be a "bargaining chip" for major miners.

In May, Chinese mills produced 46.46 million tons of steel, up from 46.01 million tons in May last year, spurred by the 4 trillion yuan (US$585 billion) stimulus package. The May figure was higher than the 30-month record low of 35.18 million tons in November, when the economic downturn forced Chinese steel makers to cut output.

Positive signals

China's large and medium steel mills turned profits in May for the first time since last October.

The World Bank raised the 2009 economic growth forecast for China to 7.2 percent from a year earlier, up from a 6.5 percent forecast in March. China's manufacturing has been expanding, with its Purchasing Managers' Index rising to 53.2 percent in June. It was the fourth straight month that the official PMI stood above 50 percent, indicating expansion.

Analysts say these improvements send positive signals.

China's climbing iron ore imports lead major mining firms to believe that demand is booming. Imports totaled 242 million tons in the first five months, a 26 percent gain from the same period last year.

The surge in imports might undermine the push for a bigger price cut, says Lange Information Consultation Co analyst Zhang Lin.

The CISA interprets the huge iron ore imports differently, saying it is a result of speculative buying by traders and small mills. It wants a ban on speculative trading of imports.

Many small private steel makers maintained production levels despite the economic slowdown, while buying iron ore from overseas suppliers and reselling to traders and steel makers without import licenses when prices rose, says Zhang Lin.

Privately owned mills have no interest in the price talks as they buy iron ore on the spot markets, says Song Jijun, deputy chief of the Metallurgical Industry Association of Hebei Province.

China has 112 steel mills and ore traders with import licenses, enabling them to buy iron ore under the pricing negotiation mechanism.

The surge in imports helped push up spot market prices, which on Monday hit a four-month high of US$78 per ton, exceeding the annual benchmark level agreed between the three miners and big steel makers elsewhere in Asia.

Spot prices have climbed 20.3 percent since Rio Tinto settled contract prices with Japanese mills on May 26.


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