China wants more swayJOHN PHACEASPrice-squeezed China is tipped...

China wants more sway

JOHN PHACEAS

Price-squeezed China is tipped to become a more aggressive investor in new iron ore developments in Australia to give it more sway in future price talks, after being forced to accept a 19 per cent rise for 2006.

Analysts said yesterday that, coming in the wake of last year's record 71.5 per cent price hike, the latest rise would make lesser-quality deposits such as WA's vast untapped reserves of magnetite even more attractive to Chinese companies.

The prediction follows Chinese steel giant Baosteel's belated acceptance yesterday of a 19 per cent price increase with Pilbara producer Rio Tinto, just hours after it struck an identical deal with BHP Billiton on Tuesday night.

Baosteel was appointed by Beijing as the sole negotiator for China's steel makers to ensure a united front in the annual price talks as it sought to leverage its growing economic might to hold down prices.

China accounts for 43 per cent of seaborne iron ore trade and had been holding out for a smaller increase, arguing its steel industry could not cope with another big rise, even though the country's demand for iron ore and raw materials has soared in recent years.

It even upped the ante by trying to use its political influence to put pressure on the Australian Government to intervene with the miners.

But its tough stance was irreparably undermined a month ago when Brazilian miner CVRD broke a six-month stalemate by striking a deal with German steel producer ThyssenKrupp.

Analysts said China had been outmanoeuvred by iron ore suppliers in price talks this year because Chinese demand continued to outstrip supply growth while production had also been hampered by cyclone-related disruptions in the Pilbara.

Chinese and Korean companies have already taken strategic stakes in proposed magnetite and hemative ventures at Koolanooka, Mt Gibson, Mt Karara and Jack Hills in WA's Mid-West, and are backing big magnetite proposals at Cape Lambert and Cape Preston in the Pilbara.

Yet with BHP Billiton, CVRD and Rio controlling 70 per cent of world seaborne supplies, China was now likely to become an even more aggressive investor in foreign iron ore mining ventures to give it greater control over supplies, analysts said.

StockResource analyst Grant Craighead said China was likely to follow the lead of Japan in the 1980s, when Japanese companies sunk big sums into new Australian coal mines.

That investment not only secured long-term supply for Japan, but ultimately resulted in huge over-capacity which forced Australian coal miners to sell coal cheaply to their Japanese customers for the next decade.

"He who owns the resource does have very strong powers," Mr Craighead said. "They (China) recognise they have a growing population and are a long-term importer of commodities, so they do need to go out and put their foot on resources."

Direct investment in new mines not only guaranteed access to raw materials, he said, but "longer term, they are encouraging cheap supply".

ABN AMRO analyst Rob Clifford said China was already an aggressive investor in new projects, but the latest price rise would accelerate that strategy. "I think it will reinforce their views that they need to do that," he said.

Because most of the world's quality resources were already in the hands of the big miners, China would also increasingly seek "strategic" joint ventures in top-rung projects - such as BHP Billiton's Wheelarra joint venture in the Pilbara with Chinese steel companies.

Mr Clifford said the Chinese would probably also engage in "more active pre-discussions" with suppliers ahead of official price talks next year to avert the deadlock which ultimately allowed CVRD to broker the ThyssenKrupp deal.

He tipped the Chinese were more likely to seek an early settlement next year.

Mr Craighead said China's huge share of the world iron ore market made it "inevitable that China will have a dominating impact on future price settlements". A united Chinese steel industry would be a natural foil to the bargaining power enjoyed by the "big three" miners, he said.

International ratings agency Fitch said the 19 per cent price rise would also spur consolidation of China's fragmented steel industry.

Nonetheless, analysts maintain that continuing tight supplies and ongoing demand growth meant prices would remain high for at least the next two years, and that no substantial fall is likely before 2009.

However, the price of steel-making coal is more likely to fall because the industry is more fragmented and new production is being brought onstream more rapidly.