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How far off is new iron ore pricing negotiation mechanism?

2009-10-27 17:12


China is seeking to establish a new iron ore pricing negotiation mechanism, said an official at the China Iron & Steel Association (CISA) at the Steel and Raw Materials Conference 2009 held in Qingdao on October 15 - 17.

Chinese steel mills failed to reach their goals in the 2009 iron ore price negotiation. As the world's three largest iron ore miners - Brazil's Vale SA, Australia's Rio Tinto and BHP Billiton - all refused to accept Chinese steel producers' demand for a 40 percent price cut, the steel mills have no choice but to turn to the cash market.

What is the proposed "new mechanism"?

The new accounting period, a long-term agreement based on the interaction between trade volume and price, as well as unified prices are three main factors that will make the new mechanism different, according to the CISA.

Current accounting period of Chinese steel mills' agreement with iron ore giants is from April 1 to March 31 of the next year. The CISA is now suggesting a new accounting period that is from January 1 to the end of the same year. "United prices" means that fixed prices should be determined for each kind of iron ore with different content and different quality from different regions and suppliers, and that there would be no differences between negotiated prices and spot prices. Both steel producers and iron ore traders should follow the unified prices.

Shan Shanghua, secretary general with the CISA, said at the conference that Chinese steel mills didn't expect steel producers in other countries and regions to refer to the prices proposed by China during the negotiation, and that Chinese steel mills would not blindly follow their agreements with the iron ore miners.

Shan noted that an agency system should be introduced into iron ore trade to make all domestic enterprises follow unified iron ore prices. Trading subsidiaries of domestic steel enterprises should also adapt the agency system when selling iron ore to other domestic companies.

Lukewarm response from ore giants

The three largest iron ore miners gave a lukewarm response toward the new pricing negotiation mechanism proposed by China. "We won't offer a price cut for iron ore in 2010. Iron ore prices may rise by 30 to 35 percent next year rather than decline by 33 percent in 2009."

FMG, which has reached an agreement with the CISA, also declined the possibility of price cuts in 2010. FMG said on October 19 that they were talking with Chinese steel producers over whether Chinese steel mills can enjoy discounts in the forth quarter.

These iron ore giants expect that China's economy will continue to recover in 2010, and that China's demand for iron ore and steel will rocket. That is an important reason why they refused to cut ore prices.

Brazil's Vale SA, Australia's Rio Tinto and BHP Billiton host 80 percent of world's total iron ore trade volume. 60 percent of China's iron ore consumption depends on import, and the imported ore is shared by nearly 1,000 steel producers.

Although Chinese steel producers are investing in overseas iron mines and domestic miners are speeding up construction, the iron ore market won't see substantive changes in the short term. Severe imbalance of supply and demand and investment barriers facing Chinese steel producers that are trying to go overseas are clear demonstrations.