China Moves to Trim Rising Transport Margins on Iron Ore, Steel

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Researched by Industrial Info Resources (Sugar Land, Texas)--For some time, the China Iron & Steel Association (CISA) has been encouraging Chinese steel companies to use domestic shipping companies to transport imported iron ore to contain and reduce the cost attached to freight. A total of 70 manufacturers and nearly 50 dealers are involved in iron ore importation, but they have not had a cohesive position on ore pricing where high margins have resulted from the increases, which have ranged from 30% to 50% since the middle of this year.

Now, in a series of related moves, China Ocean Shipping Company (COSCO) has signed three contracts in Hainan, southern China, with China's largest steelmaker Baosteel (Shanghai) to ship raw material. COSCO will build two 300,000-ton bulk cargo vessels with a carrying capacity of 1.14 tons annually that will ship iron from Brazil to China for Baosteel over the next 20 years. The first bulk vessel should be delivered and go into operation for Baosteel in 2008. COSCO sees this strategic partnership based on the importation of iron and coal speeding up the company's growth in the future. In addition, a nine-year contract has been signed on coastal shipping.

Concurrent with these shipping developments, Baosteel and Japan's largest and the world's second largest steelmaker, Nippon Steel (NYSE:NISTF ) (Tokyo, Japan) and the U.S. division of the world's largest steelmaker, Arcelor Mittal (NYSE:MT ) (Rotterdam, Netherlands), have made an agreement to build a plant to increase the output of automotive steel sheet output in China. The companies will hold stakes in the projects of 50%, 38% and 12%, respectively. Demand for automobiles is estimated to grow 15% in 2007 in China, which has become the world's second-largest auto market and is attracting an increasing number of international carmakers. The new plant will manufacture high-grade steel plated with zinc alloy and will supply Japanese carmakers operating manufacturing plants in China. The Baosteel cooperation with Nippon Steel will add technical strengths in automotive steel production and customer service to both companies.

Baosteel also has a joint project with Brazil's Companhia Vale do Rio Doce (NYSE:RIO ) (CVRD) (Rio de Janeiro, Brazil) to build a 5 million-ton-per-annum(TPA) steel slab plant in Brazil. The strategy of building plants overseas, in ore-rich regions, will also help to mitigate rising iron ore costs. In another project designed to feed domestic auto manufacturers, Russia Magnitogorsk Iron &Steel (MMK) will supply high strength steel sheet to China once its 2 million-TPA mill starts operations in 2010.

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