chinese official threatens to cut steel output

Chinese official threatens to cut steel output
Email Print Normal font Large font AdvertisementJohn Garnaut, Asia Economics Correspondent,, Beijing
April 26, 2008

THE war of words between Chinese resource officials and Australian iron ore producers has escalated, with a top official suggesting that Chinese mills may stop buying iron ore from BHP Billiton and Rio Tinto if the two miners fail to seal a contract price agreement by June 30.

Zou Jian, chairman of the China Metallurgical Mining Association, told BusinessDay that Chinese mills could take this action even if it meant slashing steel production by 10%.

Such a move could have a big impact on the Chinese, Australian and even world economies, given that China buys almost 40% of its ore imports from BHP and Rio and is likely to produce about 540 million tonnes of steel this year. It would be a drastic escalation of recent Chinese spot market embargoes, which have affected only a small fraction of Rio and BHP deliveries.

However, Mr Zou's remarks came as a senior Sinosteel executive said he expected the negotiating impasse to be resolved.

"I don't know if contracts will be signed by June 30, but the two countries have enough IQ to handle this," the executive said.

Sinosteel has played a role in previous negotiations, including the last time negotiations were as heated and protracted, in 2005.

But, in his more aggressive commentary, Mr Zou said Chinese mills would not be mounting a "boycott", as such, merely choosing not to buy. "If Australia changes or doesn't abide by the protocols of the long-term contract system, then perhaps China won't buy Australian ore at all," he said.

"China will use other methods to solve this question. China can produce a little less steel." Asked how much that might be, he said "10%".

Mr Zou is not directly involved with iron ore benchmark contract negotiations but remains intimately connected with the industry.

He was previously the director of the mining department of the Ministry of Metallurgy. He also runs China Metallurgical Mining Corporation, which trades iron ore and answers to the giant iron ore and steel trader Sinosteel.

"Zou Jian is still connected with the industry and he knows lots of key people," said one Australian mining industry executive.

Mr Zou said China hoped to sign long-term contracts with Australia. But if Australia would not agree, Chinese mills could turn to China's large domestic resources, increasing Brazilian output and, particularly, new production expected from Australia's "third force" iron ore company, Fortescue Metals Group.

This year's new contracts were due to start on April 1. China's lead steel mill, Baosteel, agreed 10 weeks ago with Brazil's Vale to price rises between 65% and 71%.

But BHP and Rio are insisting on a large premium, as a balance to cheaper Australian freight rates.

It is believed that most Australian iron ore contracts with China entitle the mining companies to switch from long-term contract prices to spot market prices if no deal is reached by June 30.

The spot price has recently eased but remains about twice as high as the landed price of Australian contract ore, even assuming a price rise this year of 65%.