China ready to cut steel output if ore talks fail

Reuters | Thu, 11 Jun 2009 14:17
[miningmx.com] -- China reduced iron ore imports in May and threatened on Thursday it was ready to cut steel output and drop annual iron ore talks, toughening its position to reject a benchmark deal accepted by Asian rivals.

China has demanded a 40 to 45 percent cut in iron ore prices from Australian miners Rio Tinto and BHP Billiton for the 2009/10 term year, rejecting a 33 percent reduction already accepted by mills in Japan and South Korea.

The tough stance of China, the world's largest steel producer, comes as Asian mills cut another deal by accepting a 28.2 percent price reduction in fine iron ore supplied by Brazil's Vale -- far short of the reduction China is seeking.

"China will not make concessions in the talks," Shan Shanghua, general secretary of the China Iron and Steel Association (CISA), who is leading China's negotiation, said in an interview with the official China Securities Journal.

"China is ready for a breakdown of the talks. In case of a short supply of iron ore, Chinese steel producers would rather cut output," Shan was quoted as saying.

If the Chinese mills are unable to get bigger price cuts and walk away from the talks, they will be forced to rely on the uncertain spot market, which has seen prices soaring to four-month highs this week as a result of China's ravenous appetite.

But its imports slowed down in May, which analysts say is a potential tactic China may be deploying to lower spot prices and regain bargaining power in the talks, as it is awash with iron ore stockpiles after importing record amounts for three months running through April.

They can even reopen closed domestic iron ore mines, many of which were forced out of business due to tumbling prices, as soaring freight costs and rebounding ore prices make them more competitive.

"With spot prices rising beyond $75 a tonne again, it is likely that domestic supply is reactivated. This could cause the level of Chinese iron ore imports to decline," Roger Downey, a Credit Suisse analyst, said.

China imported 53.46 million tonnes of iron ore in May, down 6 percent from a record 57 million tonnes in April, data from the General Administration of Customs showed on Thursday.

"The freight rates have been running up and the landed price of contract iron ore into China is ... equivalent to the spot price. We do not believe that the Australian producers will settle for a price lower than spot," Deutsche Bank analysts said.

UNCERTAINTY MOUNTS

Although Rio Tinto and Vale agreed on annual supply deals with non-Chinese customers, an agreement with China is crucial as it consumes more than half of globally traded iron ore.

"We rejected the price cut deal between the Japanese steel mills and Rio Tinto based on a comprehensive judgment regarding the operations of Chinese steel mills and oversupply in the global iron ore market," Shan was quoted as saying.

Losses at 72 large and mid-sized Chinese steelmakers in the first four months of this year totalled 5.18 billion yuan ($758 million), compared with 63.40 billion yuan in profit last year.

But Macquarie Bank analyst Henry Liu said steel production cuts were unlikely given competing interests in China, where many local governments rely on steel mills to provide jobs and foster economic growth.

"CISA is not a government body. It is just a steel sector association. I don't think their directives will work," he said.

"More importantly, the contract price is no longer relevant for the Chinese market, especially for second-tier and third-tier markets. They already buy a lot of iron ore from the spot market; 32 percent or 40 percent makes no difference," he added.

Shan said CISA and concerned government bodies would review iron ore importing licences of steel mills and trading firms, following a surge in iron ore imports that raised suspicions that importers were making speculative purchases.