Chinese Steelmakers and Iron Ore Suppliers in Stalemate over Negotiations on Contract Prices

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Researched by Industrial Info Resources (Sugar Land, Texas)--The ongoing discussions between Chinese steel manufacturing companies and iron ore suppliers for long-term contract pricing have reached a deadlock, with both parties failing to finalize mutually agreeable price cuts. A consortium of Chinese steelmakers, headed by Baoshan Iron & Steel Company Limited (SHA:600019) (Shanghai, China) and China Iron and Steel Association (Beijing), is negotiating with Companhia Vale do Rio Doce (NYSE:RIO) (Vale) (Rio De Janeiro, Brazil), BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia) and Rio Tinto Limited (NYSE:RTP) (London, England). The Chinese consortium has demanded that ore prices be slashed by 40-50% compared to last year's buying price, while the suppliers have agreed to provide a discount of only about 20%. Between them, Rio Tinto, Vale and BHP Billiton control more than 75% of the world's iron ore supply.

Every year, Chinese steel companies and iron ore suppliers come together to decide and finalize the contract pricing for supplies by April 1. The parties do not rely on commodity exchange pricing but fix prices based on mutual consent. In 2006, Baoshan was made the representative to negotiate with the suppliers on behalf of the Chinese steel industry. Industry analysts stated that the negotiations have taken longer than usual this year and a final decision will be taken by June. Since the long-term contract prices have not been signed, iron ore procurements are being made at a discount of 30-40% over last year's rates. Once the prices for this fiscal year are finalized, steelmakers will receive a refund if the fixed price is lower.

China imported 46.74 million tons of steel in February and 52.08 million tons in March of this year. In the first quarter of 2009, China's domestic iron ore output increased by 2.59% year over year. However, the excessive supply of iron ore has put a pressure on the price of finished products. The normal stockpile of iron ore in Chinese ports is about 30 million tons, but the current inventory is about 70 million tons. Chinese steelmakers have posted a combined loss of $484 million in the first quarter of this fiscal year. The next two quarters are also expected to be tough for the steel industry in the country. Steel manufacturers have urged the government to increase rebates in export tax to help companies target overseas markets. China has approved the increase of rebates for a few finished steel products. Reports indicate that China may lift the export tax on its steel products. Earlier, China had imposed a 15% export duty on finished steel products to deter exports and provide for the country's growing domestic demand.

The Chinese government's move to provide tax rebates and other perquisites to the beleaguered steel industry may pose a big threat to Indian steel makers. India imports between 3.6 million and 4 million tons per year of steel, more than 1 million tons of which comes from China. The Indian steel industry is facing a slump in demand, with production dropping about 30%. Since October 31, 2008, because of the decline in steel prices, the Indian government withdrew export taxes on a few products. However, Indian steel producers feel that their Chinese competitors have gained the advantage of government subsidies on raw materials. When the price of coke hovered around $500 per ton, Chinese steel companies were purchasing it at $300 per ton, which impacted production costs.

The Indian government recently announced that it would impose taxes for six months to curb the dumping of finished steel products in the country. The finance ministry said that China, Japan and South Korea were exporting stainless steel products at very low prices, which was severely affecting domestic production and sales. With raw material prices slumping globally, these "anti-dumping" taxes will prevent steel prices from declining further. The taxes, which will be valid until October 21, 2009, will range from around $100 to $1,000 per ton, depending on the product category and country of origin.

Steel prices increased sharply in the past four to five years prior to the credit crunch. Industry reports indicated that, prior to collapsing, the price of steel had gone up by almost 400% in the previous five years. This has been attributed to the rapid industrial development in China and other emerging economies, the real estate and property boom in Western Asia, and the growing demand in the U.S. automobile sector. However, price volatility and a sharp decline in demand because of the present economic climate have jeopardized the industry. In the second half of 2008, with the price of steel falling by 37%, most global steel producers, including the world's largest producer, ArcelorMittal (NYSE:MT) (Luxembourg), announced production cutbacks. Expansion and reconfiguration projects were also deferred.

Chinese steel makers are hoping that the $586 billion stimulus package announced by the government will help revive demand. In a recent report on the Indian steel sector, the Center for Monitoring Indian Economy (Mumbai) indicated the steel prices in India would continue to remain weak although demand would increase this fiscal year. However, with Western Asia crumbling under a huge credit crunch and Chinese exports declining, the demand for steel has dwindled. According to a report published by Morgan Stanley (NYSE:MS) (New York, New York), global steel production facilities may be forced to operate at less than 75% of their full capacities.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.