Chinese Steel Makers Continue Price Talks with Iron Ore Miners

Anchor: The annual price negotiations between the world's biggest iron ore miners and Chinese steelmakers will continue after Tuesday's negotiation deadline passed without an agreement.

A business insider said the iron ore prices are monopolized by the major miners, and suggested that Chinese steelmakers should deal with the situation by using diverse development strategies. CRI's Zheng Chenguang taks a look.

Reporter: China's steelmakers have rejected iron ore price agreements negotiated between Australian mining giant Rio Tinto and their Asian counterparts.

Rio Tinto, the world's third-largest miner, agreed with Japan's Nippon Steel Corporation and South Korea's Pohang Iron and Steel Company last month to cut its iron ore prices by about one-third.

But China Iron and Steel Association, or CISA, which heads this year's talks on behalf of Chinese steelmakers, insisted that iron ore prices should fall back to 2007 levels. That would mean a price cut of more than 40 percent in the annual contracts of iron ore.

Wang Guoqing is a researcher with the Beijing-based Lange Steel Information Research Center. She said the price of iron ore reached nearly 200 US dollars per ton last year. According to statistics from the CISA, in the first four months of this year, 72 large- and medium-sized Chinese steelmakers suffered a net loss of nearly 5.2 billion yuan, or about 760 million US dollars.

"The long-term contract signed last year was very unfavorable for us. It led to great losses for the steel industry. CISA holds its bottom line firmly this year, because otherwise we will suffer greater losses. The prices of steel declined by a large margin compared with those of last year. The prices were about 6,000 to 7,000 yuan per ton last year, but this year the prices are about 3,000 to 4,000 yuan, which are almost the cost prices. "

After China overtook Japan as the biggest buyer of iron ore in 2003, the prices of iron ore climbed from some 40 dollars to 200 dollars per ton.

Steelmakers around the world slashed their production last fall due to the financial crisis, and prices of iron ore nosedived. China's huge demand for iron ore has been vital to the major miners. However, the three biggest suppliers, namely Australia's BHP Billiton, Rio Tinto and Brazil's Vale SA, have refused China's proposal on price cuts.

The CISA said the prices proposed by the three major miners won't create a mutually beneficial relationship between iron ore suppliers and steelmakers.

Wang Guoqing noted that Chinese steelmakers took a firm stand this year because their stockpiles of iron ore are sufficient.

"Our country has a stockpile of more than 100 million tons, equal to two to three month's supply. What's more, the country has been promoting the exploration and development of state-owned mines. Recently, a mine with mineral reserves of 3 billion tons was found in Benxi, Liaoning province. It's good news for the development of state-owned mines."

If the CISA fails to reach a supply agreement with any of the three biggest mining companies, Chinese steelmakers may have to turn to the spot market for supplies.

Spot iron ore prices rose to the highest in four months and well above the annual benchmark level agreed between the three miners and big steelmakers elsewhere in Asia.

Signing an annual contract with the miners serves the long-term interests of both suppliers and steelmakers, according to Wang Guoqing.

She further noted that under the current pricing mechanism, Chinese steel enterprises should take diverse strategies to lower their costs.

"We should not only make deals with Rio Tinto, BHP Biliton and Vale, but also develop good ties with other mining companies in Australia and Brazil. We should also cooperate with mines in neighboring countries, America and South Africa. We could establish joint ventures there to exploit the mines, or by means of investment."

According to the Donghai Securities, a Shanghai-based brokerage, China may consume 60 percent of global iron ore this year.

Zheng Chenguang, CRI news.