Steel makers to settle iron ore contract
Rising seaborne freight costs and higher spot prices are putting Chinese steel makers in a weaker position in the upcoming annual talks about iron ore contract prices between worldwide mining giants and mills.
Although some Chinese industry officials insist that the contract price should soon ease after a steep rise over the past years, most analysts and research institutions expect the annual benchmark to rise for at least another year given the tight supply.
China’s ore trader Sinosteel Corp forecasts a 25 percent rise. Morgan Stanley and Merrill Lynch tip an increase of 30 percent, with Merrill even saying a 50 percent jump is “certainly not unrealistic.”
The top three iron ore miners, CVRD of Brazil and Australia’s BHP Billiton and Rio Tinto, hold talks with steel makers annually. The price for the following year is settled when the first iron ore producer settles with the first steel mill. The annual price settlements apply from April 1 to March 31, categorized as a Japanese fiscal year.
The new round of annual talks kicks off next month. The contract had risen by 71.5, 19 and 9.5 percent respectively over the past three years, adding pressure on China’s steel industry, the world’s largest.
Although global mining giants have announced plans to expand production, the capacity could be largely curbed by a shortage in port and other infrastructure facilities. A Merrill Lynch research report said the global market will remain substantially under-supplied until at least 2011.
The tightness had been reflected by the surging spot prices, which also add to negotiation strength for Brazilian and Australian miners.
India’s iron ore prices have more than doubled over the past year, after its government raised export tariffs to ensure domestic supply. India is another major ore producer which typically does business in the spot market.
According to Shanghai-based online data and information provider Mysteel, price for India’s spot ore into China, including shipping costs, rose to US$180 a ton yesterday.
That compares with the 2007 benchmark Australian price for long-term contracts of US$51.47 a ton. The charge is around US$38 a ton lately for ore from Western Australia to China, which is expected to remain high given strong oil prices and the lack of bulk carriers.
Shipping costs
Even worse, BHP Billiton has renewed efforts to recoup a location premium for its ore exports to Asia, a move to extract profit from the so-called “freight differential” between Australian and Brazilian ore landed in China. This could trigger even higher annual prices.
Soaring freight rates have made the current landed costs of Australian iron ore in China roughly 50 percent cheaper than competing Brazilian ore. According to Mysteel, the latest Brazil-China shipping rate for iron ore more than doubles that of the Western Australia-China route.
Australian miners first raised the issue unsuccessfully in early 2005.
BHP Billiton also proposed to settle the contract price by including freight rates, as they feel uncomfortable as their ore prices become far cheaper than competing Brazilian ore while landing in Asia, and also cheaper than lower-quality Indian ore on the volatile spot market.
But China feels this is negative for the nation while freight costs remain high.
“It’s not strange that BHP wants to pocket the additional payment for the freight differential as miners need capital to fund mining project expansion,” Mysteel’s analyst Jiang Liangqun said.
Back in China, the government has invested more in domestic ore exploration and production, and acted to curb the rapid growth in its steel making production by phasing out small and inefficient plants. But the effort may not significantly help reduce its reliance on ore imports, as steel production is expected to rise around 19 percent this year, the same pace as 2006.
China’s crude steel production reached 418.8 million tons last year, or a third of the world’s total.
The head of China’s largest mill, Xu Lejiang, said yesterday that domestic iron ore supply growth is lagging demand.
“China’s steel sector grew very fast but iron ore preparation is insufficient,” Xu, chairman of Shanghai-based Baosteel Group Corp, was quoted as saying by Bloomberg News.
Baosteel is representing Chinese mills in the annual iron ore price talks. Last year, China for the first time became the global benchmark setter after Baosteel struck a deal with Brazilian miner CVRD, agreeing on a 9.5-percent rise in the 2007 term price.
The annual talks have been a sensitive issue over the past few years.
Liu Yongshun, China’s chief negotiator in the past two years, has left Baosteel as the annual talks had brought too much pressure from not only the ore sellers, but also the domestic press. Any mistakes in the negotiations could translate into a sizable cost increment for the domestic steel industry for the coming year.
“I think he’s too tired. The position of chief negotiator has become a kind of political task, as the steel industry is one of the most important industries in China,” a BHP Billiton official said of Liu’s departure.
“Actually, BHP and Baosteel are very good partners. Baosteel is our key customer and we just need it,” the official said.
Baosteel
Shanghai Baosteel Group Corporation (referred to below as Baosteel) is a large iron and steel conglomerate set up on Nov. 17, 1998, with the former Baoshan Iron and Steel (Group) Corporation as the core, and absorbing the former Shanghai Metallurgical Holding Group Corporation and the former Shanghai Meishan Group Co., Ltd.
Baosteel has a registered capital of 45.8 billion Yuan. It possesses 22 wholly owned subsidiaries (including 9 overseas subsidiaries) and 14 holding companies (including 2 overseas subsidiaries) and 24 equity-sharing companies. Among the wholly owned subsidiaries and share holding companies, 11 are iron and steel companies, 2 financial companies, 8 trading companies.
Baosteel is one of the most profitable steel enterprises in the world enjoying international competence, and its annual production capacity is about 20 million tons. Baosteel produces high demand products in the domestic and international market. On Dec. 6. 2004, Standard & Poor has raised the credit rating of Shanghai Baosteel Group Corporation from BBB to BBB+ with a”stable” outlook. Baosteel was ranked No. 372 on the list of 2003 Global 500 by “Fortune” magazine on July 2004, and became the first of its kind in the competitive industry and the manufacturing sector in China to enter the world’s top 500 enterprises.
Tags: Baosteel, imports, iron-ore, Sinosteel, steel-maker
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