Posted on 03 Jul 2009
Signs of hasty compromise emerged yesterday as China battled to avoid the collapse of the 40-year-old benchmark price-setting system, which would pitch the world's largest steel producer into the uncharted waters of relying on spot-pricing and volumes to meet its iron ore needs.
After holding out for months, the aggressive China Iron & Steel Association (CISA), which is handling negotiations on behalf of Chinese steel mills, is now ready to discuss a price cut of up to 33 per cent on benchmark iron ore fines for the 2009-10 year.
This would be in line with the cuts already accepted by Japanese and South Korean steelmakers.
Rising demand for imported iron ore in
Industry sources told The Australian its backdown came as increasingly large mills were bypassing CISA to sign temporary contracts with producers at prices higher than the association was demanding.
It also comes just a day after contract clauses enabled Rio Tinto, Australia's biggest iron ore exporter and the lead negotiator with the Chinese steel mills, to shift contracted volumes to spot markets, raising the stakes in annual price talks that had never before dragged into July.
With all iron ore fines contracts now likely to be settled at about $US61 a tonne before shipping costs, the settlement represents a $13 billion drop in Australian export revenues over what would have been received at 2008 contract prices.
However, with a far greater proportion of sales going into spot markets since late last year, the final impact on revenues will be hard to calculate.
Rio and BHP Billiton have agreed to supply iron ore fines to Japanese, Korean and Taiwanese steelmakers at 33 per cent less than 2008 prices, while the price of more expensive lump, of which
Despite the falls, the prices for the 2009-10 year still represent the second-highest contract settlement on record and remain above 2007 levels.
For Rio, which makes more than half its earnings from iron ore, the backdown from
When talks started, analysts were tipping falls in fines of up to 40 per cent.
BHP, though a smaller producer than
The retreat is a major blow for state-backed CISA, which this year seized control of negotiations that have previously been run by China's 16 steelmaking heavyweights and headed by the country's biggest mill operator, Baosteel.
CISA has been intransigent in its demands for the past six months on a price cut of 40-45 per cent.
But according to Chinese media outlets, officials attending a closed meeting of the body late on Tuesday said they would accept a lower price.
BHP and Rio yesterday said they were once again in talks with CISA after Chinese business magazine and website Caijing revealed no serious discussions had taken place between CISA and BHP, Rio Tinto and
CISA represents the 72 main steelmakers with up to 75 per cent of production in
It is now seeking six or three-month contracts, bending to reality as a growing number of mills strike deals outside official negotiations and the percentage of ore imported into China climbed from 50 to 70 per cent.
"The negotiated price doesn't affect the whole market very much, since many mills are buying from spot market," Zhang Xinyun, sales manager at Kaixuan Trading in the northeastern Chinese city of
"As a matter of fact, we were not expecting a very good price to come out of the negotiations -- the Chinese are not a united people."
This week Rio said half of its contract iron ore to
Prices are now about $US65 a tonne before shipping costs, which is higher than the contract price of $US61 negotiated with
BHP has been pushing an index price system based on the spot price, to replace the benchmark system, for the past 12 months.
