News Room - Steel Industry

Posted on 03 Mar 2010

One iron ore price spells more chaos in China market

China, the world’s largest consumer of iron ore, is pushing for a “unified price” to rein in its chaotic market in the commodity, but its woes stem from a long conflict between state-owned mills and private operators.

 

The China Iron and Steel Association, best known for its dramatic failure to wring price concessions from global miners in 2009, has been lobbying since last summer to fix strict “guidance” prices on iron ore and thin out licensed importers.

 

CISA says the steps will give the industry a single voice and avert the sort of uncontrolled production spree that doubled China’s steel inventories by the end of 2009 and carried ore imports to a record 628 million tonnes.

 

But analysts said the more China tried to unify the market by limiting licences and setting fixed prices, the more chaotic it would become, with more than 1,000 mills nationwide still clamouring for the raw material needed to meet demand, which has doubled in five years to reach 568 million tonnes in 2009.

 

“The big mills have permits to import contract iron ore, but a large number of small mills do not,” said Ma Zhongpu, senior analyst with Custeel, an industry consultancy with links to CISA.

 

“If China cannot give all its steel mills an equal and fair opportunity, then the problem is ours. This is the problem with the contract pricing system in China.”

 

UNITED FRONT

 

CISA’s hopes for a united front in last year’s benchmark price talks withered after the spot market went into feverish overdrive, and the body blamed rogue traders and disobedient private mills for “ignoring market signals” and supporting Rio Tinto, BHP Billiton and Vale, the three dominant global iron ore suppliers.

 

The expansion of small private mills raised spare capacity to more than 130 million tonnes, making it harder for the market to sustain steel price hikes, CISA said.

 

Since May 2009, steel prices have risen 16 per cent, with iron ore up 68 per cent over the period, data from consultancy Mysteel showed.

 

To rein in the small players, CISA asked the government for powers to revoke the bulk of China’s import licences and enforce one fixed price, but analysts felt it had allowed its command economy instincts to cloud its judgement – especially as the global iron and steel market grows more fluid.

 

“It is unworkable naivete to even attempt to keep any product prices constant in a market economy -- trying to be reactionary has made CISA an international laughing stock,” said a senior industry analyst who did not want to be named.

 

FOREIGN BULLIES

 

CISA, a quasi-government body drawn mainly from officials of defunct industry planning bureaus, accuses the big miners of exploiting the gap between spot and benchmark prices, cutting contract volumes and forcing China to rely on spot deliveries.

 

CISA chief Wu Xichun, a 55-year veteran of the steel industry, told a February news conference the three big miners were selling only 50 to 55 per cent of iron ore to China via benchmark pacts, with the rest sold at spot prices.

 

China believes it is being treated unfairly compared to Japan, which receives all its ore through contract deliveries. Custeel’s Ma said miners were using the spot market to “bully” Chinese mills into accepting a higher benchmark.

 

China will insist any new price deal includes an undertaking to boost contract supplies, but its own rising demand might shatter those expectations.

 

Its steel industry bought three times more iron ore last year than just five years ago, and much of the additional material was bought on spot terms. By contrast, Japan’s imports fell by a quarter over the period.

 

World steel output reached 1.22 billion tonnes in 2009, up 14 per cent from 2004, with growth in China fuelling most of the rise as its total output share rose to 46.5 per cent from 26 per cent.

 

“China’s huge market growth in the last decade has already destabilised the (benchmark pricing) process, and trying to find a one-price-fits-all for 365 days a year has proved unworkable,” said the senior industry analyst.

 

And Chinese mills are not in a position to cry foul if miners boost spot sales: while Japanese mills stuck to contracts even when spot prices fell below the benchmark in late 2008, many in China reneged on millions of tonnes of contracted deliveries.

 

CISA’s desire to fix prices also puts it in direct conflict with the mining majors who want to scrap the benchmark system in favour of spot price indexing.

 

“If that occurs, CISA’s role in negotiating ore prices evaporates,” said James Wilson, a mining analyst for DJ Carmichael & Co in Perth.

 

Rio and BHP last year gave Chinese mills the option of buying on spot or the 2009/10 benchmark equivalent set with Japanese and South Korean steelmakers.

 

This year they may be less flexible and insist that spot pricing completely replace annual benchmarking, as they strive to persuade regulators to approve a planned merger of Australian iron ore operations by showing they no longer set prices.

 

BHP Billiton refused to sign new long-term deals in 2008, spelling an end to all benchmark sales by the end of the decade.

 

CONFLICT OF INTEREST

 

Much of the blame for China’s two-tier pricing structure still lies with the fragmented domestic industry.

 

Last year, China allowed just 15 big state-owned steelmakers to sign long-term import contracts and 112 mills and traders to import any ore at all. The state giants then sold off surplus at a profit to the minnows.

 

CISA wants to cut the number of licensed importers to 40 from around 70 now but the move could skew the system still further in the state giants’ favour, forcing small mills to seek options.

 

“This is what is causing the problems: they have no choice but to go to the spot market and panic-buy,” said Ma of Custeel. – Reuters