China hints at iron ore compromise

Reuters | Tue, 02 Jun 2009 09:42
[miningmx.com] -- Chinese steel mills will offer a new proposal in benchmark iron ore price talks, a top Chinese executive said on Tuesday, less than a week after their rivals in Japan and South Korea offered to pay more than expected.

"We have decided on a new proposal for the negotiation, but I cannot tell you details," Luo Bingsheng, vice chairman of the China Iron and Steel Association, told reporters.

The new proposal wil not water down China's demand for a drop of at least 40 percent in iron ore prices, winding the clock back to 2007, he said on the sidelines of a conference.

"The iron ore price should fall to the 2007 level. This is still our main target in the negotiation," Luo said.

This year's price talks have splintered following the collapse of global markets for steel, iron ore and freight, with buyers and sellers breaking ranks to get the best deal on offer.

The traditional price-setter, China, was beaten to the punch by Japanese and South Korean steel rivals, who settled on a higher price than Chinese mills were willing to pay, agreeing a 33 percent cut with Rio Tinto.

The biggest iron ore miner, Vale of Brazil, has held back from the negotiations, while the third big producer, BHP Billiton, wants indexed prices to replace the annual benchmark system.

With the fate of the talks wide open, some analysts say China could put pressure on the miners by sticking to the spot market.

"It's not in the miners' interests to sell all their iron ore on a spot basis," said RBS Australia analyst Warren Edney. "China are the major part of the market now. Rio and BHP would like to know how many tonnes they'd like this year."

Rio Tinto, which has sold about half the iron ore mined this year on a spot basis, is still talking to Chinese mills.

"We continue to negotiate with our remaining customers, the bulk of whom are in China," Sam Walsh, head of Rio's iron ore unit, said in a statement on Monday. "We believe the settlements achieved to date demonstrate that customers appreciate the certainty of price and volume that the benchmark system ensures."

CHINA NEEDS "CORRECTION"

China, the only major producer with higher steel output than last year, is enjoying a flood of iron ore imports, thanks to a collapse in world prices, cheap shipping, relatively high-cost domestic iron ore and its uniquely buoyant steel sector.

Luo said CISA expected a global iron ore surplus of 200-300 million tonnes this year. China's share of the iron ore trade has ballooned this year as demand elsewhere has fallen away.

Whether China can keep churning out steel at higher rates than last year and buying record amounts of ore is unclear.

CISA has warned against mills blindly rushing to produce, while Lakshmi Mittal, head of top global steelmaker ArcelorMittal, has said he expected China's $586 billion state stimulus package to fill the hole in demand left by exports.

China's government wants to trim the sector down and cap this year's production at 460 million tonnes, 8 percent below 2008, by forging a few big firms from the existing myriad of mills.

"After years of massively expanding production, China's steel industry needs a big correction," Luo said.

With so much steel supply, demand could be swamped. Analysts at Macquarie said unless real demand kicks in soon, Chinese inventories could pile up in the second half of the year.

"Steel prices increased recently and production levels remain high but we feel it has been a recovery based on domestic speculation rather than real tangible evidence," analysts at the bank said in a note to clients last week.

The oversupply has sparked trade disputes with Russia and the United States over allegations of dumping. Luo said he wanted to see more help for exports and more restrictions on imports.

"We suggest that we should have a flexible and measurable export trade policy and we need to adjust our export tariffs policy. We need a sweeping change," he told the conference.

"For imports, we should have a strict import policy on steel products. We have raised these suggestions to related government departments and they are currently discussing them."

China's Ministry Commerce said on Monday it is investigating U.S. and Russian imports of some steel products, and Luo suggested the investigation could be widened.

"We import a lot of steel slab and low end finished products from eastern Europe and they sell the products at about $300 or more. The price seems to be lower than the production cost," he said. "Surely we have the right to launch a trade investigation."