Plenty of opinions out there. This from The Melbourne Age..
China lacks the steel for iron ore advantage JOHN GARNAUT In the ever-changing iron ore market, China is proving its own worst enemy. LOGIC suggests that the dynamics of an iron ore supply glut, a steel industry collapse and a new Team China approach to this year's iron ore benchmark price negotiations would lead China to overturn five years of national humiliation and bring Vale, Rio Tinto and BHP Billiton to their knees. Luckily for Australia, there is little that is logical about iron ore in China. In February, BusinessDay revealed that China Iron & Steel Association boss Shan Shanghua had put a personal representative into the annual price talks for the first time. Shan is best known in Australia for crippling Chinalco's public relations campaign by boasting that the company's investment in Rio Tinto would "break the duopoly in Australian iron ore supply". Initially, inside the secretive negotiating room at Baosteel's Shanghai steel works, the CISA representative sat behind Baosteel's Ding Shouhu and confined himself to an advisory role. In recent weeks there has been something of a mutiny. "This year CISA is claiming they are the leader and Baosteel is only assisting them," says a company insider. "Baosteel seems very frustrated." The new CISA negotiator has threatened to unite the Chinese steel industry into an import cartel for the common purpose of screwing down this year's benchmark price. He has promised to set not only the contract price but also the import volumes for all of China's major steel mills, holding out the lure that the greatest volumes will be reserved for whichever miner cracks first. CISA has largely bypassed BHP and Vale and directed negotiations onto Rio Tinto and second-tier mining companies, notably Fortescue, in the belief that the more vulnerable mining companies will have to crack. Meanwhile, the iron ore market should be shifting decisively in China's favour. Figures on Friday showed China imported a world record 52 million tonnes of iron ore - up 10 per cent from February - despite sluggish Chinese steel consumption. Port stocks have risen by 10 million tonnes or about 15 per cent since February. Chinese buyers say (and the miners deny) that Vale, Rio Tinto and BHP Billiton are offering as much as 50per cent in secret high-volume deals. Chinese mills are armed with near-record stockpiles and would seem well placed to destroy a desperate mining opposition. Instead, Shan's negotiating strategy to set the benchmark contract price is in chaos. "In the past the buyers have been played like servants," says Jerry Wang, who runs a Beijing trading company called Fortune Steel Resources. "Now the market has changed, the situation of the two sides has inverted, but it seems the servant is not quite used to his new role as the lord." The problem with Shan's threats is that he lacks the power and the credibility to make them happen. Fortescue won't buckle to Chinese pressure and make a settlement because it knows the big miners will ignore it, stranding Fortescue with discount contracts. Andrew Forrest can't rely on the steel association's promise of high volumes because he knows it doesn't have the credibility or the power to force its members to follow through. And what looks like a strategy to build stockpiles and pressure miners is in fact the result of accidentally letting the big miners break through China's unofficial import barriers. Until November, the steel association and the mainly state-owned mills that make up its membership had a two-tiered system that reserved the higher-quality, lower-cost Brazilian and Australian ore for themselves. Smaller and mid-sized mills were forced to buy domestic and Indian iron ore on the domestic spot market, often at twice the price. But the struggling large mills quit their import contracts when the spot market price collapsed below the benchmark price late last year. A space opened up for the global miners to directly supply China's smaller and mid-sized mills. In 2007, about half of the iron ore in China came from domestic mines. Last year the proportion slipped to 40per cent, with imports of 444million tonnes and domestic production of about 300million tonnes. This year, the best industry surveys suggest domestic production has fallen by another third, to about 200 million tonnes annually. While Chinese iron ore consumption is falling, global miners are set to raise annual sales to China by about 150 million tonnes in just two years. CISA might yet achieve a benchmark price cut of about 40per cent but the result will be largely meaningless, at least in China. The whole benchmark system is in the process of breaking down. China's 500 or so steel companies are splintering and the global iron ore tri-opoly has broken open the Chinese market. All of this is bad for China's large mills and their industry association, but it's actually good for China. The more efficient private sector is filling the space vacated by the state-owned mills and creating something more like a level playing field. It's good for Australia, too. This year's fall in export receipts will not be as catastrophic as Australian policymakers have been bracing for.
Good luck to all and DYOR
UMC Price at posting:
85.0¢ Sentiment: Buy Disclosure: Held
