China OKs individual iron ore deals as talks stalemate

[] — China’s steel industry body will allow mills to sign individual supply deals with global miners, as it seemed to abandon efforts to preserve annual pricing that for months had appeared doomed.

But the China Iron and Steel Association didn’t go down without a fight, pledging on Wednesday to boost domestic iron ore output and cut its reliance on ore bought from the big three miners, Vale, BHP Billiton and Rio Tinto.

Luo Bingsheng, the vice-chairman of the China Iron and Steel Association, said at a media briefing that the benchmark negotiations with the three mining giants were “stranded”, with neither side willing to yield.

This meant that the association was easing up on its hardline opposition to domestic steel mills signing their own individual deals with miners, saying enterprises had to ensure they had enough iron ore to maintain output.

“Individual steel makers can approach the global miners for supply in line with CISA rules,” he said.

Asked to elaborate, Luo said that although China did not officially accept the demands of the miners, after the official negotiation deadline ended on April 1 with no new deal, mills still had a right to sign supply contracts.

“It is totally the individual companies’ business — we will not interfere,” he told reporters on the sidelines of the briefing.

Previously, the association had forbidden its members from signing contracts until a national benchmark deal had been reached, even suggesting the agreements would have no legal validity, but despite the threats, a number of local mills have already done deals.

Last year, CISA led China’s ill-fated attempt to force the miners to offer a special discount “China price” to local steel mills. After its strategy failed, it blamed smaller steel firms for signing their own supply agreements and thereby undermining China’s negotiating position.

Analysts suggested it was now bowing to the inevitable.

“If Japan, Korea or Europe had got annual contracts, they might have had a case to dig in their heels, but this was inevitable,” said John Johnson, chief executive of CRU China in Beijing.

“Last year’s situation couldn’t continue — the uncertainty about what you are paying, and having to agree prices retroactively — and the certainty of quarterly prices is better than no certainty at all,” he said.

Steel mills racing to meet record levels of demand have no choice but to buy on terms as favourable as possible, said Li Xinchuang, president of the China Metallurgical Industry Planning and Research Institute.

“Steel production is a continuous process and if contracts aren’t signed, how can you continue producing?” he said.

“The benchmark has already disappeared and continuing to talk is meaningless.”


CISA’s secretary general Shan Shanghua said at a meeting earlier this month that Chinese customers should stop buying ore from the three big miners for two months and rely instead on their stockpiles.

At Wednesday’s briefing, Luo said that inventories at steel mills could last for two months, but he did not repeat the call for a boycott.

He said China was at a big disadvantage in the pricing talks, and that steel mills across the world had little choice but to accept the new quarterly pricing system — and the price hikes in excess of 90 percent — now being offered by miners.

“The current negotiations have not been negotiations at all because no buyers have been given a say,” Luo said.

The dominant position of Vale, BHP and Rio — which between them control three quarters of the global seaborne iron ore market — meant that they were no longer considering the interests of their customers, he said.

He said Chinese steel mills in the first quarter of the year were still using ore bought at cheaper prices in 2009, and that the full pressure of surging raw material costs would only start to be felt in the coming months.

Luo suggested that while China had conceded defeat this year, it was trying to make long-term improvements in its position.

China was now trying to encourage domestic iron ore output, the exploration and utilisation of low-grade deposits at home and the acquisition of mines overseas, and the country would take a “strategic national approach” to resolving its dependence on the big foreign suppliers, he said.