hebei steel seeks to finance aurox project, page-11

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Buyer's market at Chinese steel conferenceFont Size: Decrease Increase Print Page: Print Rowan Callick, China correspondent | October 23, 2008
THE annual China Iron and Steel Association conference that kicks off the price-setting process for Australia's crucial iron ore exports -- for the first time in many years -- will be more concerned about buyers than sellers.

The association will be using the conference, which began last night in Qingdao, as a platform to add downward pressure to the iron ore price.

It failed in the past few years, as China's growth soared in double digits. But this is set to change, as the impetus for the 2009 talks shifts to the buyers, due to the global downturn that is also now starting to hit China's "real economy", affecting steel demand.

Last year, Australia earned $9billion from iron ore sales to China -- the nation's biggest single export item -- and the figure will be considerably higher for 2008.

The big three ore producers -- BHP Billiton, Rio Tinto and Brazil's Vale -- have each upset CISA's sensibilities over the past year. None will be making a formal presentation to the conference which is attended by more than 600 movers and shakers. BHP's takeover bid for Rio has been widely viewed with anxiety in China as a move that would give the merged entity greater control over price and supply. And its attempt to radically reorganise price-setting along market-driven London Metals Exchange lines has yet to make much headway.

Rio upset China by shifting as much as possible of its ore deliveries to China to the spot market rather than under the contracted price that is the subject of the annual talks. The spot price in the previous years leapt far above the contract figure. But the financial downturn has caused this trend to be reversed, so that Rio ended up both upsetting some clients and losing income.

Vale had presented itself as the best friend of the buyers, after it settled on 65-71 per cent rises for 2008 while the Australian firms pressed on and obtained rises that ranged from 79.88 to 96.50 per cent. But Vale then also upset the buyers by seeking to reopen the price negotiations by asking them for a further 20 per cent, a move the mills rejected.

So the presentations from Australia will come from the smaller mining sector, which does not participate in the price-setting talks, led by Fortescue Metals. Charles Schaus, the managing director of Aurox Resources, another West Australian company, will also be talking to the conference.

Yesterday he had a meeting with the principals of Hebei Iron and Steel, a major new consolidated group which already has an agreement to buy ore from Aurox once its mine starts producing. But he is also inviting Hebei to get further behind the construction of the mine by taking an equity stake.

Tianjin-based Rockcheck, one of China's 10 biggest private steel mills, has not only agreed to buy 3 million tonnes a year from Aurox, but has recently begun increasing its stake, buying on the market, to 11.44 per cent this week.

The opening up of new sources of iron also depends heavily on the continued commitment of the West Australian Government to press ahead with infrastructure development plans.

But these are early days in the process. This year's price was not finally fixed until July. There is some pressure being applied in the margins, to one or two smaller Australian producers, over the timing of deliveries.

However, it is unlikely that the core contracts will be renegotiated or even nullified. The quantum shipped to China will not be slashed substantially, although since contracts allow for slight variation there may be a modest fall from recent record highs.

The moderating of the oil price provides some relief for the industry as a whole, for both producers and buyers, because the oil surge added considerably to costs on both sides, and especially to shipping charges.

An official with a north China steel mill told China Mining and Metals Newswire last weekend: "The unfolding financial crisis this year has severely dented demand for steel products worldwide. Chinese steel mills are now being squeezed hard by abnormally high raw material prices and sliding product prices. As they find it more difficult to make ends meet, many are forced to cut back output."

Yu Liangyu, an analyst with industry website Mysteel, claimed last week that China's mills had cut production by 20 per cent.

If this downturn is sustained, one of the key questions will be whether any resulting reduction in ore purchases will come from domestic ore, mostly sold on the spot market, or from contracted international ore, chiefly from Australia and Brazil.

However, Ma Yanping, an analyst with Umetal, said: "Although CISA and most of the steel mills wish to balance supply and demand on the domestic market and therefore stabilise domestic steel product prices through production cuts, a large number still seem reluctant to act.

"This is because for large-scale steel mills, production disruptions would lead to significant trouble for labour arrangements as well as for lending from banks in the future. Therefore some steel mills are maintaining normal production so long as they are able to maintain overall profitability."

The latest iron ore stockpile figures seem to confirm Mr Ma's analysis. Ore at China's 22 major ports last weekend was a high 71 million tonnes -- but 1.6 per cent down on the previous week.